[House Report 115-466]
[From the U.S. Government Publishing Office]


115th Congress  }                                           { Report

                          HOUSE OF REPRESENTATIVES 

 1st Session    }                                           { 115-466               
                                                            
_______________________________________________________________________


                         TAX CUTS AND JOBS ACT

                               __________


                           CONFERENCE REPORT

                              TO ACCOMPANY

                                 H.R. 1


             [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



              December 15, 2017.--Ordered to be printed
              
              
              
                      U.S. GOVERNMENT PUBLISHING OFFICE
                
27-788                         WASHINGTON: 2017              
              
              
              
              
                            C O N T E N T S

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CONFERENCE REPORT................................................     1
JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE.......   191
TITLE I--INDIVIDUAL TAX REFORM...................................   191
          A. Reduction and Simplification of Individual Income 
              Tax Rates (sec. 1001 of the House bill, sec. 11001 
              of the Senate amendment, and sec. 1 of the Code)...   191
              1. Increase in standard deduction (sec. 1002 of the 
                  House bill, sec. 11021 of the Senate amendment, 
                  and sec. 63 of the Code).......................   201
              2. Repeal of the deduction for personal exemptions 
                  (sec. 1003 of the House bill, sec. 11041 of the 
                  Senate amendment, and sec. 151 of the Code)....   202
              3. Alternative inflation adjustment (secs. 1001 and 
                  1005 of the House bill, sec. 11002 of the 
                  Senate amendment, and sec. 1 of the Code)......   204
          B. Treatment of Business Income of Individuals, Trusts, 
              and Estates........................................   205
              1. Deduction for qualified business income (sec. 
                  1004 of the House bill, sec. 11011 of the 
                  Senate amendment, and sec. 199A of the Code)...   205
          C. Simplification and Reform of Family and Individual 
              Tax Credits........................................   225
              1. Enhancement of child tax credit and new family 
                  credit (sec. 1101 of the House bill, sec. 11022 
                  of the Senate amendment, and sec. 24 of the 
                  Code)..........................................   225
              2. Credit for the elderly and permanently disabled 
                  (sec. 1102(a) of the House bill and sec. 22 of 
                  the Code)......................................   228
              3. Repeal of credit for plug-in electric drive 
                  motor vehicles (sec. 1102(c) of the House bill 
                  and sec. 30D of the Code)......................   229
              4. Termination of credit for interest on certain 
                  home mortgages (sec. 1102(b) of the House bill 
                  and sec. 25 of the Code).......................   229
              5. Modification of taxpayer identification number 
                  requirements for the child tax credit, earned 
                  income credit, and American Opportunity credit 
                  (sec. 1103 of the House bill, sec. 11022 of the 
                  Senate amendment and secs. 24, 25A and 32 of 
                  the Code)......................................   230
              6. Procedures to reduce improper claims of earned 
                  income credit (sec. 1104 of the House bill and 
                  new secs. 32(c)(2)(B)(vii) and 6011(i) of the 
                  Code)..........................................   233
              7. Certain income disallowed for purposes of the 
                  earned income tax credit (sec. 1105 of the 
                  House bill, new secs. 32(n) and 32(c)(2)(C) of 
                  the Code, and secs. 6051, 6052, 6041(a), and 
                  6050(w) of the Code)...........................   235
              8. Limitation on losses for taxpayers other than 
                  corporations (sec. 11012 of the Senate 
                  amendment and sec. 461(l) of the Code).........   238
              9. Reform of American opportunity tax credit and 
                  repeal of lifetime learning credit (sec. 1201 
                  of the House bill and sec. 25A of the Code)....   240
              10. Consolidation and modification of education 
                  savings rules (sec. 1202 of the House bill, 
                  sec. 11033 of the Senate amendment, and secs. 
                  529 and 530 of the Code).......................   241
              11. Reforms to discharge of certain student loan 
                  indebtedness (sec. 1203 of the House bill, sec. 
                  11031 of the Senate amendment, and sec. 108 of 
                  the Code)......................................   246
              12. Repeal of deduction for student loan interest 
                  (sec. 1204 of the House bill and sec. 221 of 
                  the Code)......................................   248
              13. Repeal of deduction for qualified tuition and 
                  related expenses (sec. 1204 of the House bill 
                  and sec. 222 of the Code)......................   249
              14. Repeal of exclusion for qualified tuition 
                  reductions (sec. 1204 of the House bill and 
                  sec. 117(d) of the Code).......................   249
              15. Repeal of exclusion for interest on United 
                  States savings bonds used for higher education 
                  expenses (sec. 1204 of the House bill and sec. 
                  135 of the Code)...............................   250
              16. Repeal of exclusion for educational assistance 
                  programs (sec. 1204 of the House bill and sec. 
                  127 of the Code)...............................   251
              17. Rollovers between qualified tuition programs 
                  and qualified ABLE programs (sec. 1205 of the 
                  House bill, sec. 11025 of the Senate amendment 
                  and secs. 529 and 529A of the Code)............   252
              18. Repeal of overall limitation on itemized 
                  deductions (sec. 1301 of the House bill, sec. 
                  11046 of the Senate amendment, and sec. 68 of 
                  the Code)......................................   255
          D. Simplification and Reform of Deductions and 
              Exclusions.........................................   256
              1. Modification of deduction for home mortgage 
                  interest (sec. 1302 of the House bill, sec. 
                  11043 of the Senate amendment, and sec. 163(h) 
                  of the Code)...................................   256
              2. Modification of deduction for taxes not paid or 
                  accrued in a trade or business (sec. 1303 of 
                  the House bill, sec. 11042 of the Senate 
                  amendment, and sec. 164 of the Code)...........   259
              3. Repeal of deduction for personal casualty and 
                  theft losses (sec. 1304 of the House bill, sec. 
                  11044 of the Senate amendment, and sec. 165 of 
                  the Code)......................................   261
              4. Limitation on wagering losses (sec. 1305 of the 
                  House bill, sec. 11051 of the Senate amendment, 
                  and sec. 165 of the Code)......................   262
              5. Modifications to the deduction for charitable 
                  contributions (sec. 1306 of the House bill, 
                  secs. 11023, 13703, and 13704 of the Senate 
                  amendment, and sec. 170 of the Code)...........   263
              6. Repeal of Certain Miscellaneous Itemized 
                  Deductions Subject to the Two-Percent Floor 
                  (secs. 1307 and 1312 of the House bill, sec. 
                  11045 of the Senate amendment, and secs. 62, 67 
                  and 212 of the Code)...........................   273
              7. Repeal of deduction for medical expenses (sec. 
                  1308 of the House bill, sec. 11028 of the 
                  Senate amendment and sec. 213 of the Code).....   276
              8. Repeal of deduction for alimony payments and 
                  corresponding inclusion in gross income (sec. 
                  1309 of the House bill and secs. 61, 71, and 
                  215 of the Code)...............................   277
              9. Repeal of deduction for moving expenses (sec. 
                  1310 of the House bill, sec. 11050 of the 
                  Senate amendment, and sec. 217 of the Code)....   278
              10. Termination of deduction and exclusions for 
                  contributions to medical savings accounts (sec. 
                  1311 of the House bill, secs. 106(b) and 220 of 
                  the Code)......................................   279
              11. Denial of deduction for performing artists and 
                  certain officials; Modification of deduction 
                  for educator expenses (sec. 1312 of the House 
                  bill, sec. 11032 of the Senate amendment and 
                  sec. 62 of the Code)...........................   281
              12. Suspension of exclusion for qualified bicycle 
                  commuting reimbursement (sec. 11048 of the 
                  Senate amendment and secs. 132(f) of the Code).   282
              13. Limitation on exclusion for employer-provided 
                  housing (sec. 1401 of the House bill and sec. 
                  119 of the Code)...............................   283
              14. Modification of exclusion of gain on sale of a 
                  principal residence (sec. 1402 of the House 
                  bill, sec. 11047 of the Senate amendment, and 
                  sec. 121 of the Code)..........................   284
              15. Sunset of exclusion for dependent care 
                  assistance programs (sec. 1404 of the House 
                  bill and sec. 129 of the Code).................   285
              16. Repeal of exclusion for qualified moving 
                  expense reimbursement (sec. 1405 of the House 
                  bill, sec. 11049 of the Senate amendment, and 
                  sec. 132(g) of the Code).......................   286
              17. Repeal of exclusion for adoption assistance 
                  programs (sec. 1406 of the House bill and sec. 
                  137 of the Code)...............................   286
           E. Simplification and Reform of Savings, Pensions, 
              Retirement.........................................   288
              1. Repeal of special rule permitting 
                  recharacterization of IRA contributions (sec. 
                  1501 of the House bill, sec. 13611 of the 
                  Senate amendment, and sec. 408A of the Code)...   288
              2. Reduction in minimum age for allowable in-
                  service distributions (sec. 1502 of the House 
                  bill and secs. 401 and 457 of the Code)........   291
              3. Modification of rules governing hardship 
                  distributions (sec. 1503 of the House bill and 
                  secs. 401 and 403 of the Code).................   292
              4. Modification of rules relating to hardship 
                  withdrawals from cash or deferred arrangements 
                  (sec. 1504 of the bill, sec. 11033(c) of the 
                  Senate amendment, and sec. 401 of the Code)....   293
              5. Extended rollover period for the rollover of 
                  plan loan offset amounts in certain cases (sec. 
                  1505 of the bill, sec. 13613 of the Senate 
                  amendment, and sec. 402 of the Code)...........   294
              6. Modification of nondiscrimination rules for 
                  certain plans providing benefits or 
                  contributions to older, longer service 
                  participants (sec. 1506 of the House bill and 
                  sec. 401 of the Code)..........................   296
              7. Modification of rules applicable to length of 
                  service award programs for bona fide public 
                  safety volunteers (sec. 13612 of the Senate 
                  amendment and sec. 457(e) of the Code).........   306
          F. Modifications to Estate, Gift, and Generation-
              Skipping Transfers Taxes (secs 1601 and 1602 of the 
              House bill, sec. 11061 of the Senate amendment, and 
              secs. 2001 and 2010 of the Code)...................   307
          G. Alternative Minimum Tax (sec. 2001 of the House 
              bill, sec. 12001 of the Senate amendment, and secs. 
              53 and 55-59 of the Code)..........................   317
          H. Elimination of Shared Responsibility Payment for 
              Individuals Failing to Maintain Minimal Essential 
              Coverage (sec. 11081 of the Senate amendment and 
              sec. 5000A of the Code)............................   323
          I. Other Provisions....................................   325
              1. Temporarily allow increased contributions to 
                  ABLE accounts, and allow contributions to be 
                  eligible for saver's credit (sec. 11024 of the 
                  Senate amendment and sec. 529A of the Code)....   325
              2. Extension of time limit for contesting IRS levy 
                  (sec. 11071 of the Senate amendment and secs. 
                  6343 and 6532 of the Code).....................   329
              3. Treatment of certain individuals performing 
                  services in the Sinai Peninsula of Egypt (sec. 
                  11026 of the Senate amendment and secs. 2, 112, 
                  692, 2201, 3401, 4253, 6013, and 7508 of the 
                  Code)..........................................   330
              4. Modifications of user fees requirements for 
                  installment agreements (sec. 11073 of the 
                  Senate amendment and new sec. 6159(f) of the 
                  Code)..........................................   331
              5. Relief for 2016 disaster areas (sec. 11029 of 
                  the Senate amendment and secs. 72(t), 165, 401-
                  403, 408, 457, and 3405 of the Code)...........   332
              6. Attorneys' fees relating to awards to 
                  whistleblowers (sec. 11078 of the Senate 
                  amendment and sec. 62(a)(21) of the Code)......   335
              7. Clarification of whistleblower awards (sec. 
                  11079 of the Senate amendment and new sec. 
                  7623(c) of the Code)...........................   336
              8. Exclusion from gross income of certain amounts 
                  received by wrongly incarcerated individuals 
                  (sec. 11027 of the Senate amendment and sec. 
                  139F of the Code)..............................   340
BUSINESS TAX REFORM..............................................   341
          A. Tax Rates...........................................   341
              1. Reduction in corporate tax rate (sec. 3001 of 
                  the House bill, secs. 13001 and 13002 of the 
                  Senate amendment, and secs. 11 and 243 of the 
                  Code)..........................................   341
          B. Cost Recovery.......................................   346
              1. Increased expensing (sec. 3101 of the House 
                  bill, secs. 13201 and 13311 of the Senate 
                  amendment, and sec. 168(k) of the Code)........   346
              2. Modifications to depreciation limitations on 
                  luxury automobiles and personal use property 
                  (sec. 13202 of the Senate amendment and sec. 
                  280F of the Code)..............................   357
              3. Modifications of treatment of certain farm 
                  property (sec. 13203 of the Senate amendment 
                  and sec. 168 of the Code)......................   360
              4. Applicable recovery period for real property 
                  (sec. 13204 of the Senate amendment and sec. 
                  168 of the Code)...............................   362
              5. Use of alternative depreciation system for 
                  electing farming businesses (sec. 13205 of the 
                  Senate amendment and sec. 168 of the Code).....   367
              6. Expensing of certain costs of replanting citrus 
                  plants lost by reason of casualty (sec. 13207 
                  of the Senate amendment and sec. 263A of the 
                  Code)..........................................   370
          C. Small Business Reforms..............................   372
              1. Expansion of section 179 expensing (sec. 3201 of 
                  the House bill, sec. 13101 of the Senate 
                  amendment, and sec. 179 of the Code)...........   372
              2. Small business accounting method reform and 
                  simplification (sec. 3202 of the House bill, 
                  secs. 13102 through 13105 of the Senate 
                  amendment, and secs. 263A, 448, 460, and 471 of 
                  the Code)......................................   375
              3. Modification of treatment of S corporation 
                  conversions to C corporations (sec. 3204 of the 
                  House bill, sec. 13543 of the Senate amendment, 
                  and secs. 481 and 1371 of the Code)............   382
          D. Reform of Business Related Exclusions, Deductions, 
              etc................................................   385
              1. Interest (secs. 3203 and 3301 of the House bill, 
                  secs. 13301 and 13311 of the Senate amendment, 
                  and sec. 163(j) of the Code)...................   385
              2. Modification of net operating loss deduction 
                  (sec. 3302 of the House bill, sec. 13302 of the 
                  Senate amendment, and sec. 172 of the Code)....   393
              3. Like-kind exchanges of real property (sec. 3303 
                  of the House bill, and sec. 13303 of the Senate 
                  amendment, and sec. 1031 of the Code)..........   394
              4. Revision of treatment of contributions to 
                  capital (sec. 3304 of the House bill and sec. 
                  118 of the Code)...............................   397
              5. Repeal of deduction for local lobbying expenses 
                  (sec. 3305 of the House bill, sec. 13308 of the 
                  Senate amendment, and sec. 162(e) of the Code).   399
              6. Repeal of deduction for income attributable to 
                  domestic production activities (sec. 3306 of 
                  the House bill, sec. 13305 of the Senate 
                  amendment, and sec. 199 of the Code)...........   400
              7. Entertainment, etc. expenses (sec. 3307 of the 
                  House bill, sec. 13304 of the Senate amendment, 
                  and sec. 274 of the Code)......................   402
              8. Repeal of exclusion, etc., for employee 
                  achievement awards (sec. 1403 of the House 
                  bill, sec. 13310 of the Senate amendment, and 
                  secs. 74(c) and 274(j) of the Code)............   407
              9. Unrelated business taxable income increased by 
                  amount of certain fringe benefit expenses for 
                  which deduction is disallowed (sec. 3308 of the 
                  House bill and sec. 512 of the Code)...........   408
              10. Limitation on deduction for FDIC premiums (sec. 
                  3309 of the House bill, sec. 13531 of the 
                  Senate amendment, and sec. 162 of the Code)....   410
              11. Repeal of rollover of publicly traded 
                  securities gain into specialized small business 
                  investment companies (sec. 3310 of the House 
                  bill and sec. 1044 of the Code)................   412
              12. Certain self-created property not treated as a 
                  capital asset (sec. 3311 of the House bill and 
                  sec. 1221 of the Code).........................   413
              13. Repeal of special rule for sale or exchange of 
                  patents (sec. 3312 of the House bill and sec. 
                  1235 of the Code)).............................   414
              14. Repeal of technical termination of partnerships 
                  (sec. 3313 of the House bill and sec. 708(b) of 
                  the Code)......................................   415
              15. Recharacterization of certain gains in the case 
                  of partnership profits interests held in 
                  connection with performance of investment 
                  services (sec. 3314 of the House bill, sec. 
                  13310 of the Senate amendment, and secs. 1061 
                  and 83 of the Code)............................   416
              16. Amortization of research and experimental 
                  expenditures (sec. 3315 of the House bill, sec. 
                  13206 of the Senate amendment, and sec. 174 of 
                  the Code)......................................   423
              17. Certain special rules for taxable year of 
                  inclusion (sec. 13221 of the Senate amendment 
                  and sec. 451 of the Code)......................   425
              18. Denial of deduction for certain fines, 
                  penalties, and other amounts (sec. 13306 of the 
                  Senate amendment and sec. 162(f) and new sec. 
                  6050X of the Code).............................   430
              19. Denial of deduction for settlements subject to 
                  nondisclosure agreements paid in connection 
                  with sexual harassment or sexual abuse (sec. 
                  13307 of the Senate amendment and new sec. 
                  162(q) of the Code)............................   431
              20. Uniform treatment of expenses in contingency 
                  fee cases (sec. 3316 of the House bill and new 
                  sec. 162(q) of the Code).......................   432
          E. Reform of Business Credits..........................   433
              1. Repeal of credit for clinical testing expenses 
                  for certain drugs for rare diseases or 
                  conditions (sec. 3401 of the House bill, sec. 
                  13401 of the Senate amendment, and sec. 45C of 
                  the Code)......................................   433
              2. Repeal of employer-provided child care credit 
                  (sec. 3402 of the House bill and sec. 42F of 
                  the Code)......................................   434
              3. Rehabilitation credit (sec. 3403 of the House 
                  bill, sec. 13402 of the Senate amendment, and 
                  sec. 47 of the Code)...........................   435
              4. Repeal of work opportunity tax credit (sec. 3404 
                  of the House bill and sec. 51 of the Code).....   436
              5. Repeal of deduction for certain unused business 
                  credits (sec. 3405 of the House bill, sec. 
                  13403 of the Senate amendment, and sec. 196 of 
                  the Code)......................................   438
              6. Termination of new markets tax credit (sec. 3406 
                  of the House bill and sec. 45D of the Code)....   439
              7. Repeal of credit for expenditures to provide 
                  access to disabled individuals (sec. 3407 of 
                  the House bill and sec. 44 of the Code)........   441
              8. Modification of credit for portion of employer 
                  social security taxes paid with respect to 
                  employee tips (sec. 3408 of the House bill and 
                  sec. 45B of the Code)..........................   442
              9. Employer credit for paid family and medical 
                  leave (sec. 13403 of the Senate amendment, and 
                  new sec. 45S of the Code)......................   443
          F. Energy Credits......................................   445
              1. Modifications to credit for electricity produced 
                  from certain renewable resources (sec. 3501 of 
                  the House bill and sec. 45 of the Code)........   445
              2. Modification of the energy investment tax credit 
                  (sec. 3502 of the House bill and sec. 48 of the 
                  Code)..........................................   446
              3. Extension and phaseout of residential energy 
                  efficient property credit (sec. 3503 of the 
                  House bill and sec. 25D of the Code)...........   450
              4. Repeal of enhanced oil recovery credit (sec. 
                  3504 of the House bill and sec. 43 of the Code)   452
              5. Repeal of credit for producing oil and gas from 
                  marginal wells (sec. 3505 of the House bill and 
                  sec. 45I of the Code)..........................   452
              6. Modification of credit for production from 
                  advanced nuclear power facilities (sec. 3506 of 
                  the House bill and sec. 45J of the Code).......   453
          G. Bond Reforms........................................   455
              1. Termination of private activity bonds (sec. 3601 
                  of the bill and sec. 103 of the Code)..........   455
              2. Repeal of advance refunding bonds (sec. 3602 of 
                  the bill, sec. 13532 of the Senate amendment, 
                  and sec. 149(d) of the Code)...................   458
              3. Repeal of tax credit bonds (sec. 3603 of the 
                  bill and secs. 54A, 54B, 54C, 54D, 54E, 54F and 
                  6431 of the Code)..............................   459
              4. No tax-exempt bonds for professional stadiums 
                  (sec. 3604 of the bill and sec. 103 of the 
                  Code)..........................................   462
          H. Insurance...........................................   464
              1. Net operating losses of life insurance companies 
                  (sec. 3701 of the House bill, sec. 13511 of the 
                  Senate amendment, and sec. 810 of the Code)....   464
              2. Repeal of small life insurance company deduction 
                  (sec. 3702 of the House bill, sec. 13512 of the 
                  Senate amendment, and sec. 806 of the Code)....   465
              3. Surtax on life insurance company taxable income 
                  (sec. 3703 of the House bill and sec. 801 of 
                  the Code)......................................   466
              4. Adjustment for change in computing reserves 
                  (sec. 3704 of the House bill, sec. 13513 of the 
                  Senate amendment, and sec. 807 of the Code)....   466
              5. Repeal of special rule for distributions to 
                  shareholders from pre-1984 policyholders 
                  surplus account (sec. 3705 of the House bill, 
                  sec. 13514 of the Senate amendment, and sec. 
                  815 of the Code)...............................   467
              6. Modification of proration rules for property and 
                  casualty insurance companies (sec. 3706 of the 
                  House bill, sec. 13515 of the Senate amendment, 
                  and sec. 832 of the Code)......................   469
              7. Modification of discounting rules for property 
                  and casualty insurance companies (sec. 3707 of 
                  the House bill and sec. 832 of the Code).......   470
              8. Repeal of special estimated tax payments (sec. 
                  3708 of the House bill, sec. 13516 of the 
                  Senate amendment, and sec. 847 of the Code)....   473
              9. Computation of life insurance tax reserves (sec. 
                  13517 of the Senate amendment and sec. 807 of 
                  the Code)......................................   476
              10. Modification of rules for life insurance 
                  proration for purposes of determining the 
                  dividends received deduction (sec. 13518 of the 
                  Senate amendment and sec. 812 of the Code).....   479
              11. Capitalization of certain policy acquisition 
                  expenses (sec. 13519 of the Senate amendment 
                  and sec. 848 of the Code)......................   482
              12. Tax reporting for life settlement transactions, 
                  clarification of tax basis of life insurance 
                  contracts, and exception to transfer for 
                  valuable consideration rules (secs. 13518 
                  through 13520 of the Senate amendment and secs. 
                  101, 1016, and 6050X of the Code)..............   483
          I. Compensation........................................   486
              1. Modification of limitation on excessive employee 
                  remuneration (sec. 3801 of the House bill, sec. 
                  13601 of the Senate amendment, and sec. 162(m) 
                  of the Code)...................................   486
              2. Excise tax on excess tax-exempt organization 
                  executive compensation (sec. 3802 of the House 
                  bill, sec. 13602 of the Senate amendment, and 
                  sec. 4960 of the Code).........................   491
              3. Treatment of qualified equity grants (sec. 3803 
                  of the House bill, sec. 13603 of the Senate 
                  amendment, and secs. 83, 3401, and 6051 of the 
                  Code)..........................................   494
              4. Increase in excise tax rate for stock 
                  compensation of insiders in expatriated 
                  corporations (sec. 13604 of the Senate 
                  amendment and sec. 4985 of the Code)...........   503
          J. Other Provisions....................................   509
              1. Treatment of gain or loss of foreign persons 
                  from sale or exchange of interests in 
                  partnerships engaged in trade or business 
                  within the United States (sec. 13501 of the 
                  Senate amendment and secs. 864(c) and 1446 of 
                  the Code)......................................   509
              2. Modification of the definition of substantial 
                  built-in loss in the case of transfer of 
                  partnership interest (sec. 13502 of the Senate 
                  amendment and sec. 743 of the Code)............   512
              3. Charitable contributions and foreign taxes taken 
                  into account in determining limitation on 
                  allowance of partner's share of loss (sec. 
                  13503 of the Senate amendment and sec. 704 of 
                  the Code)......................................   513
              4. Cost basis of specified securities determined 
                  without regard to identification (sec. 13533 of 
                  the Senate amendment and sec. 1012 of the Code)   515
              5. Expansion of qualifying beneficiaries of an 
                  electing small business trust (sec. 13541 of 
                  the Senate amendment and sec. 1361 of the Code)   517
              6. Charitable contribution deduction for electing 
                  small business trusts (sec. 13542 of the Senate 
                  amendment and sec. 642(c) of the Code).........   518
              7. Production period for beer, wine, and distilled 
                  spirits (sec. 13801 of the Senate amendment and 
                  sec. 263A of the Code).........................   519
              8. Reduced rate of excise tax on beer (sec. 13802 
                  of the Senate amendment and sec. 5051 of the 
                  Code)..........................................   520
              9. Transfer of beer between bonded facilities (sec. 
                  13803 of the Senate amendment and sec. 5414 of 
                  the Code)......................................   522
              10. Reduced rate of excise tax on certain wine 
                  (sec. 13804 of the Senate amendment and sec. 
                  5041 of the Code)..............................   524
              11. Adjustment of alcohol content level for 
                  application of excise tax rates (sec. 13805 of 
                  the Senate amendment and sec. 5041 of the Code)   526
              12. Definition of mead and low alcohol by volume 
                  wine (sec. 13806 of the Senate amendment and 
                  sec. 5041 of the Code).........................   527
              13. Reduced rate of excise tax on certain distilled 
                  spirits (sec. 13807 of the Senate amendment and 
                  sec. 5001 of the Code).........................   529
              14. Bulk distilled spirits (sec. 13808 of the 
                  Senate amendment and sec. 5212 of the Code)....   530
              15. Modification of tax treatment of Alaska Native 
                  Corporations and Settlement Trusts (sec. 13821 
                  of the Senate amendment and sec. 6039H and new 
                  secs. 139G and 247 of the Code)................   531
              16. Amounts paid for aircraft management services 
                  (sec. 13822 of the Senate amendment and sec. 
                  4261 of the Code)..............................   534
              17. Opportunity zones (sec. 13823 of the Senate 
                  amendment and new secs. 1400Z-1 and 1400Z-2 of 
                  the Code)......................................   537
              18. Provisions relating to the low-income housing 
                  credit (secs. 13411 and 13412 of the Senate 
                  amendment and sec. 42 of the Code).............   540
EXEMPT ORGANIZATIONS.............................................   542
          A. Unrelated Business Income Tax.......................   542
              1. Clarification of unrelated business income tax 
                  treatment of entities exempt from tax under 
                  section 501(a) (sec. 5001 of the House bill and 
                  sec. 511 of the Code)..........................   542
              2. Exclusion of research income from unrelated 
                  business taxable income limited to publicly 
                  available research (sec. 5002 of the House bill 
                  and sec. 512(b)(9) of the Code)................   543
              3. Unrelated business taxable income separately 
                  computed for each trade or business activity 
                  (sec. 13703 of the Senate amendment and sec. 
                  512(a) of the Code)............................   545
          B. Excise Taxes........................................   548
              1. Simplification of excise tax on private 
                  foundation investment income (sec. 5101 of the 
                  House bill and sec. 4940 of the Code)..........   548
              2. Private operating foundation requirements 
                  relating to operation of an art museum (sec. 
                  5102 of the House bill and sec. 4942(j) of the 
                  Code)..........................................   549
              3. Excise tax based on investment income of private 
                  colleges and universities (sec. 5103 of the 
                  House bill, sec. 13701 of the Senate amendment, 
                  and new sec. 4968 of the Code).................   552
              4. Provide an exception to the private foundation 
                  excess business holdings rules for 
                  philanthropic business holdings (sec. 5104 of 
                  the House bill and sec. 4943 of the Code)......   556
          C. Requirements for Organizations Exempt From Tax......   559
              1. Section 501(c)(3) organizations permitted to 
                  make statements relating to political campaign 
                  in ordinary course of activities in carrying 
                  out exempt purpose (sec. 5201 of the House bill 
                  and sec. 501 of the Code)......................   559
              2. Additional reporting requirements for donor 
                  advised fund sponsoring organizations (sec. 
                  5202 of the House bill and sec. 6033 of the 
                  Code)..........................................   561
INTERNATIONAL TAX PROVISIONS.....................................   595
          A. Establishment of Participation Exemption System for 
              Taxation of Foreign Income.........................   595
              1. Deduction for foreign-source portion of 
                  dividends received by domestic corporations 
                  from specified 10-percent owned foreign 
                  corporations (sec. 4001 of the House bill, sec. 
                  14101 of the Senate amendment, and new sec. 
                  245A of the Code)..............................   595
              2. Modification of subpart F inclusion for 
                  increased investments in United States property 
                  (sec. 4002 of the House bill, sec. 14218 of the 
                  Senate amendment, and sec. 956 of the Code)....   600
              3. Special rules relating to sales or transfers 
                  involving specified 10-percent owned foreign 
                  corporations (sec. 4003 of the House bill, sec. 
                  14102 of the Senate Amendment and secs. 
                  367(a)(3)(C), 961, 1248 and new sec. 91 of the 
                  Code)..........................................   601
              4. Treatment of deferred foreign income upon 
                  transition to participation exemption system of 
                  taxation and deemed repatriation at two-tier 
                  rate (sec. 4004 of the House bill, sec. 14103 
                  of the Senate amendment, and secs. 78, 904, 907 
                  and 965 of the Code)...........................   606
              5. Election to increase percentage of domestic 
                  taxable income offset by overall domestic loss 
                  treated as foreign source (sec. 14305 of the 
                  Senate amendment and sec. 904(g) of the Code)..   622
          B. Rules Related to Passive and Mobile Income..........   622
              1. Deduction for foreign-derived intangible income 
                  and global intangible low-taxed income (sec. 
                  14202 of the Senate amendment and new sec. 250 
                  of the Code)...................................   622
              2. Special rules for transfers of intangible 
                  property from controlled foreign corporations 
                  to United States shareholders (sec. 14203 of 
                  the Senate amendment and new sec. 966 of the 
                  Code)..........................................   627
          C. Modifications Related to Foreign Tax Credit System..   628
              1. Repeal of section 902 indirect foreign tax 
                  credits; determination of section 960 credit on 
                  current year basis (sec. 4101 of the House 
                  bill, sec. 14301 of the Senate amendment, and 
                  secs. 902 and 960 of the Code).................   628
              2. Source of income from sales of inventory 
                  determined solely on basis of production 
                  activities (sec. 4102 of the House bill, sec. 
                  14304 of the Senate amendment, and sec. 863(b) 
                  of the Code)...................................   629
              3. Separate foreign tax credit limitation basket 
                  for foreign branch income (sec. 14302 of the 
                  Senate amendment and sec. 904 of the Code).....   630
              4. Acceleration of election to allocate interest, 
                  etc., on a worldwide basis (sec. 14303 of the 
                  Senate amendment and sec. 864 of the Code).....   630
          D. Modification of Subpart F Provisions................   631
              1. Repeal of inclusion based on withdrawal of 
                  previously excluded subpart F income from 
                  qualified investment (sec. 4201 of the House 
                  bill, sec. 14213 of the Senate amendment, and 
                  sec. 955 of the Code)..........................   631
              2. Repeal of treatment of foreign base company oil 
                  related income as subpart F income (sec. 4202 
                  of the House bill, sec. 14211 of the Senate 
                  amendment, and sec. 954(a) of the Code)........   631
              3. Inflation adjustment of de minimis exception for 
                  foreign base company income (sec. 4203 of the 
                  House bill, sec. 14212 of the Senate amendment, 
                  and sec. 954(b)(3) of the Code)................   632
              4. Look-thru rule for related controlled foreign 
                  corporations made permanent (sec. 4204 of the 
                  House bill, sec. 14217 of the Senate amendment, 
                  and sec. 954(c)(6) of the Code)................   632
              5. Modification of stock attribution rules for 
                  determining CFC status (sec. 4205 of the House 
                  bill, sec. 14214 of the Senate amendment, and 
                  secs. 318 and 958 of the Code).................   633
              6. Modification of definition of United States 
                  shareholder (sec. 14215 of the Senate amendment 
                  and sec. 951 of the Code)......................   634
              7. Elimination of requirement that corporation must 
                  be controlled for 30 days before subpart F 
                  inclusions apply (sec. 4206 of the House bill, 
                  sec. 14216 of the Senate amendment, and sec. 
                  951(a)(1) of the Code).........................   634
              8. Current year inclusion of foreign high return 
                  amounts or global intangible low-taxed income 
                  by United States shareholders (sec. 4301 of the 
                  House bill, sec. 14201 of the Senate amendment, 
                  and secs. 78 and 960 and new sec. 951A of the 
                  Code)..........................................   635
              9. Limitation on deduction of interest by domestic 
                  corporations which are members of an 
                  international group (sec. 4302 of the House 
                  bill, sec. 14221 of the Senate amendment, and 
                  new sec. 163(n) of the Code)...................   645
          E. Prevention of Base Erosion..........................   649
              1. Base erosion using deductible cross-border 
                  payments between affiliated companies (sec. 
                  4303 of the House bill and new secs. 4491 and 
                  6038E of the Code; sec. 14401 of the Senate 
                  amendment and secs. 6038A and 6038C and new 
                  secs. 59A and 59B of the Code).................   649
              2. Limitations on income shifting through 
                  intangible property transfers (sec. 14222 of 
                  the bill and secs. 367, 482, and 936 of the 
                  Code)..........................................   661
              3. Certain related party amounts paid or accrued in 
                  hybrid transactions or with hybrid entities 
                  (sec. 14223 of the Senate amendment and sec. 
                  267A of the Code)..............................   662
              4. Shareholders of surrogate foreign corporations 
                  not eligible not eligible for reduced rate on 
                  dividends (sec. 14225 of the Senate amendment 
                  and sec. 1 of the Code)........................   664
          F. Provisions Related to the Possessions of the United 
              States.............................................   664
              1. Extension of deduction allowable with respect to 
                  income attributable to domestic production 
                  activities in Puerto Rico (sec. 4401 of the 
                  House bill and sec. 199 of the Code)...........   664
              2. Extension of temporary increase in limit on 
                  cover over of rum excise taxes to Puerto Rico 
                  and the Virgin Islands (sec. 4402 of the House 
                  bill and sec. 7652(f) of the Code).............   666
              3. Extension of American Samoa economic development 
                  credit (sec. 4403 of the House bill and sec. 
                  119 of Pub. L. No. 109-432)....................   667
          G. Other International Reforms.........................   669
              1. Restriction on insurance business exception to 
                  the passive foreign investment company rules 
                  (sec. 4501 of the House bill, sec. 14502 of the 
                  Senate amendment, and sec. 1297 of the Code)...   669
              2. Repeal of fair market value of interest expense 
                  apportionment (sec. 14503 of the Senate 
                  amendment and sec. 864 of the Code)............   672
              3. Modification to source rules involving 
                  possessions (sec. 14504 of the Senate amendment 
                  and sec. 865 of the Code)......................   672
TITLE II--JOINT EXPLANATORY STATEMENT............................   675
CONGRESSIONAL EARMARKS, LIMITED TAX BENEFITS, AND LIMITED TARIFF 
  BENEFITS.......................................................   676
TAX COMPLEXITY ANALYSIS..........................................   676





115th Congress }                                          {   Report
                        HOUSE OF REPRESENTATIVES
 1st Session   }                                          {   115-466

======================================================================

 
                         TAX CUTS AND JOBS ACT

                                _______
                                

               December 15, 2017.--Ordered to be printed

                                _______
                                

  Mr. Brady of Texas, from the Committee of Conference, submitted the 
                               following

                           CONFERENCE REPORT

                         [To accompany H.R. 1]

      The committee of conference on the disagreeing votes of 
the two Houses on the amendment of the Senate to the bill (H.R. 
1), to provide for reconciliation pursuant to titles II and V 
of the concurrent resolution on the budget for fiscal year 
2018, having met, after full and free conference, have agreed 
to recommend and do recommend to their respective Houses as 
follows:
      That the House recede from its disagreement to the 
amendment of the Senate and agree to the same with an amendment 
as follows:
      In lieu of the matter proposed to be inserted by the 
Senate amendment, insert the following:

                                TITLE I

SEC. 11000. SHORT TITLE, ETC.

    (a) Short Title.--This title may be cited as the ``Tax Cuts 
and Jobs Act''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this title an amendment or repeal is 
expressed in terms of an amendment to, or repeal of, a section 
or other provision, the reference shall be considered to be 
made to a section or other provision of the Internal Revenue 
Code of 1986.

                   Subtitle A--Individual Tax Reform

                        PART I--TAX RATE REFORM

SEC. 11001. MODIFICATION OF RATES.

    (a) In General.--Section 1 is amended by adding at the end 
the following new subsection:
    ``(j) Modifications for Taxable Years 2018 Through 2025.--
            ``(1) In general.--In the case of a taxable year 
        beginning after December 31, 2017, and before January 
        1, 2026--
                    ``(A) subsection (i) shall not apply, and
                    ``(B) this section (other than subsection 
                (i)) shall be applied as provided in paragraphs 
                (2) through (6).
            ``(2) Rate tables.--
                    ``(A) Married individuals filing joint 
                returns and surviving spouses.--The following 
                table shall be applied in lieu of the table 
                contained in subsection (a):


 
       ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $19,050.....................  10% of taxable income.
Over $19,050 but not over $77,400....  $1,905, plus 12% of the excess
                                        over $19,050.
Over $77,400 but not over $165,000...  $8,907, plus 22% of the excess
                                        over $77,400.
Over $165,000 but not over $315,000..  $28,179, plus 24% of the excess
                                        over $165,000.
Over $315,000 but not over $400,000..  $64,179, plus 32% of the excess
                                        over $315,000.
Over $400,000 but not over $600,000..  $91,379, plus 35% of the excess
                                        over $400,000.
Over $600,000........................  $161,379, plus 37% of the excess
                                        over $600,000.

                    ``(B) Heads of households.--The following 
                table shall be applied in lieu of the table 
                contained in subsection (b):


 
       ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $13,600.....................  10% of taxable income.
Over $13,600 but not over $51,800....  $1,360, plus 12% of the excess
                                        over $13,600.
Over $51,800 but not over $82,500....  $5,944, plus 22% of the excess
                                        over $51,800.
Over $82,500 but not over $157,500...  $12,698, plus 24% of the excess
                                        over $82,500.
Over $157,500 but not over $200,000..  $30,698, plus 32% of the excess
                                        over $157,500.
Over $200,000 but not over $500,000..  $44,298, plus 35% of the excess
                                        over $200,000.
Over $500,000........................  $149,298, plus 37% of the excess
                                        over $500,000.

                    ``(C) Unmarried individuals other than 
                surviving spouses and heads of households.--The 
                following table shall be applied in lieu of the 
                table contained in subsection (c):


 
       ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $9,525......................  10% of taxable income.
Over $9,525 but not over $38,700.....  $952.50, plus 12% of the excess
                                        over $9,525.
Over $38,700 but not over $82,500....  $4,453.50, plus 22% of the excess
                                        over $38,700.
Over $82,500 but not over $157,500...  $14,089.50, plus 24% of the
                                        excess over $82,500.
Over $157,500 but not over $200,000..  $32,089.50, plus 32% of the
                                        excess over $157,500.
Over $200,000 but not over $500,000..  $45,689.50, plus 35% of the
                                        excess over $200,000.
Over $500,000........................  $150,689.50, plus 37% of the
                                        excess over $500,000.

                    ``(D) Married individuals filing separate 
                returns.--The following table shall be applied 
                in lieu of the table contained in subsection 
                (d):


 
       ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $9,525......................  10% of taxable income.
Over $9,525 but not over $38,700.....  $952.50, plus 12% of the excess
                                        over $9,525.
Over $38,700 but not over $82,500....  $4,453.50, plus 22% of the excess
                                        over $38,700.
Over $82,500 but not over $157,500...  $14,089.50, plus 24% of the
                                        excess over $82,500.
Over $157,500 but not over $200,000..  $32,089.50, plus 32% of the
                                        excess over $157,500.
Over $200,000 but not over $300,000..  $45,689.50, plus 35% of the
                                        excess over $200,000.
Over $300,000........................  $80,689.50, plus 37% of the
                                        excess over $300,000.

                    ``(E) Estates and trusts.--The following 
                table shall be applied in lieu of the table 
                contained in subsection (e):


 
       ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $2,550......................  10% of taxable income.
Over $2,550 but not over $9,150......  $255, plus 24% of the excess over
                                        $2,550.
Over $9,150 but not over $12,500.....  $1,839, plus 35% of the excess
                                        over $9,150.
Over $12,500.........................  $3,011.50, plus 37% of the excess
                                        over $12,500.

                    ``(F) References to rate tables.--Any 
                reference in this title to a rate of tax under 
                subsection (c) shall be treated as a reference 
                to the corresponding rate bracket under 
                subparagraph (C) of this paragraph, except that 
                the reference in section 3402(q)(1) to the 
                third lowest rate of tax applicable under 
                subsection (c) shall be treated as a reference 
                to the fourth lowest rate of tax under 
                subparagraph (C).
            ``(3) Adjustments.--
                    ``(A) No adjustment in 2018.--The tables 
                contained in paragraph (2) shall apply without 
                adjustment for taxable years beginning after 
                December 31, 2017, and before January 1, 2019.
                    ``(B) Subsequent years.--For taxable years 
                beginning after December 31, 2018, the 
                Secretary shall prescribe tables which shall 
                apply in lieu of the tables contained in 
                paragraph (2) in the same manner as under 
                paragraphs (1) and (2) of subsection (f) 
                (applied without regard to clauses (i) and (ii) 
                of subsection (f)(2)(A)), except that in 
                prescribing such tables--
                            ``(i) subsection (f)(3) shall be 
                        applied by substituting `calendar year 
                        2017' for `calendar year 2016' in 
                        subparagraph (A)(ii) thereof,
                            ``(ii) subsection (f)(7)(B) shall 
                        apply to any unmarried individual other 
                        than a surviving spouse or head of 
                        household, and
                            ``(iii) subsection (f)(8) shall not 
                        apply.
            ``(4) Special rules for certain children with 
        unearned income.--
                    ``(A) In general.--In the case of a child 
                to whom subsection (g) applies for the taxable 
                year, the rules of subparagraphs (B) and (C) 
                shall apply in lieu of the rule under 
                subsection (g)(1).
                    ``(B) Modifications to applicable rate 
                brackets.--In determining the amount of tax 
                imposed by this section for the taxable year on 
                a child described in subparagraph (A), the 
                income tax table otherwise applicable under 
                this subsection to the child shall be applied 
                with the following modifications:
                            ``(i) 24-percent bracket.--The 
                        maximum taxable income which is taxed 
                        at a rate below 24 percent shall not be 
                        more than the sum of--
                                    ``(I) the earned taxable 
                                income of such child, plus
                                    ``(II) the minimum taxable 
                                income for the 24-percent 
                                bracket in the table under 
                                paragraph (2)(E) (as adjusted 
                                under paragraph (3)) for the 
                                taxable year.
                            ``(ii) 35-percent bracket.--The 
                        maximum taxable income which is taxed 
                        at a rate below 35 percent shall not be 
                        more than the sum of--
                                    ``(I) the earned taxable 
                                income of such child, plus
                                    ``(II) the minimum taxable 
                                income for the 35-percent 
                                bracket in the table under 
                                paragraph (2)(E) (as adjusted 
                                under paragraph (3)) for the 
                                taxable year.
                            ``(iii) 37-percent bracket.--The 
                        maximum taxable income which is taxed 
                        at a rate below 37 percent shall not be 
                        more than the sum of--
                                    ``(I) the earned taxable 
                                income of such child, plus
                                    ``(II) the minimum taxable 
                                income for the 37-percent 
                                bracket in the table under 
                                paragraph (2)(E) (as adjusted 
                                under paragraph (3)) for the 
                                taxable year.
                    ``(C) Coordination with capital gains 
                rates.--For purposes of applying section 1(h) 
                (after the modifications under paragraph 
                (5)(A))--
                            ``(i) the maximum zero rate amount 
                        shall not be more than the sum of--
                                    ``(I) the earned taxable 
                                income of such child, plus
                                    ``(II) the amount in effect 
                                under paragraph (5)(B)(i)(IV) 
                                for the taxable year, and
                            ``(ii) the maximum 15-percent rate 
                        amount shall not be more than the sum 
                        of--
                                    ``(I) the earned taxable 
                                income of such child, plus
                                    ``(II) the amount in effect 
                                under paragraph (5)(B)(ii)(IV) 
                                for the taxable year.
                    ``(D) Earned taxable income.--For purposes 
                of this paragraph, the term `earned taxable 
                income' means, with respect to any child for 
                any taxable year, the taxable income of such 
                child reduced (but not below zero) by the net 
                unearned income (as defined in subsection 
                (g)(4)) of such child.
            ``(5) Application of current income tax brackets to 
        capital gains brackets.--
                    ``(A) In general.--Section 1(h)(1) shall be 
                applied--
                            ``(i) by substituting `below the 
                        maximum zero rate amount' for `which 
                        would (without regard to this 
                        paragraph) be taxed at a rate below 25 
                        percent' in subparagraph (B)(i), and
                            ``(ii) by substituting `below the 
                        maximum 15-percent rate amount' for 
                        `which would (without regard to this 
                        paragraph) be taxed at a rate below 
                        39.6 percent' in subparagraph 
                        (C)(ii)(I).
                    ``(B) Maximum amounts defined.--For 
                purposes of applying section 1(h) with the 
                modifications described in subparagraph (A)--
                            ``(i) Maximum zero rate amount.--
                        The maximum zero rate amount shall be--
                                    ``(I) in the case of a 
                                joint return or surviving 
                                spouse, $77,200,
                                    ``(II) in the case of an 
                                individual who is a head of 
                                household (as defined in 
                                section 2(b)), $51,700,
                                    ``(III) in the case of any 
                                other individual (other than an 
                                estate or trust), an amount 
                                equal to \1/2\ of the amount in 
                                effect for the taxable year 
                                under subclause (I), and
                                    ``(IV) in the case of an 
                                estate or trust, $2,600.
                            ``(ii) Maximum 15-percent rate 
                        amount.--The maximum 15-percent rate 
                        amount shall be--
                                    ``(I) in the case of a 
                                joint return or surviving 
                                spouse, $479,000 (\1/2\ such 
                                amount in the case of a married 
                                individual filing a separate 
                                return),
                                    ``(II) in the case of an 
                                individual who is the head of a 
                                household (as defined in 
                                section 2(b)), $452,400,
                                    ``(III) in the case of any 
                                other individual (other than an 
                                estate or trust), $425,800, and
                                    ``(IV) in the case of an 
                                estate or trust, $12,700.
                    ``(C) Inflation adjustment.--In the case of 
                any taxable year beginning after 2018, each of 
                the dollar amounts in clauses (i) and (ii) of 
                subparagraph (B) shall be increased by an 
                amount equal to--
                            ``(i) such dollar amount, 
                        multiplied by
                            ``(ii) the cost-of-living 
                        adjustment determined under subsection 
                        (f)(3) for the calendar year in which 
                        the taxable year begins, determined by 
                        substituting `calendar year 2017' for 
                        `calendar year 2016' in subparagraph 
                        (A)(ii) thereof.
                If any increase under this subparagraph is not 
                a multiple of $50, such increase shall be 
                rounded to the next lowest multiple of $50.
            ``(6) Section 15 not to apply.--Section 15 shall 
        not apply to any change in a rate of tax by reason of 
        this subsection.''.
    (b) Due Diligence Tax Preparer Requirement With Respect to 
Head of Household Filing Status.--Subsection (g) of section 
6695 is amended to read as follows:
    ``(g) Failure to Be Diligent in Determining Eligibility for 
Certain Tax Benefits.--Any person who is a tax return preparer 
with respect to any return or claim for refund who fails to 
comply with due diligence requirements imposed by the Secretary 
by regulations with respect to determining--
            ``(1) eligibility to file as a head of household 
        (as defined in section 2(b)) on the return, or
            ``(2) eligibility for, or the amount of, the credit 
        allowable by section 24, 25A(a)(1), or 32,
shall pay a penalty of $500 for each such failure.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 11002. INFLATION ADJUSTMENTS BASED ON CHAINED CPI.

    (a) In General.--Subsection (f) of section 1 is amended by 
striking paragraph (3) and by inserting after paragraph (2) the 
following new paragraph:
            ``(3) Cost-of-living adjustment.--For purposes of 
        this subsection--
                    ``(A) In general.--The cost-of-living 
                adjustment for any calendar year is the 
                percentage (if any) by which--
                            ``(i) the C-CPI-U for the preceding 
                        calendar year, exceeds
                            ``(ii) the CPI for calendar year 
                        2016, multiplied by the amount 
                        determined under subparagraph (B).
                    ``(B) Amount determined.--The amount 
                determined under this clause is the amount 
                obtained by dividing--
                            ``(i) the C-CPI-U for calendar year 
                        2016, by
                            ``(ii) the CPI for calendar year 
                        2016.
                    ``(C) Special rule for adjustments with a 
                base year after 2016.--For purposes of any 
                provision of this title which provides for the 
                substitution of a year after 2016 for `2016' in 
                subparagraph (A)(ii), subparagraph (A) shall be 
                applied by substituting `the C-CPI-U for 
                calendar year 2016' for `the CPI for calendar 
                year 2016' and all that follows in clause (ii) 
                thereof.''.
    (b) C-CPI-U.--Subsection (f) of section 1 is amended by 
striking paragraph (7), by redesignating paragraph (6) as 
paragraph (7), and by inserting after paragraph (5) the 
following new paragraph:
            ``(6) C-CPI-U.--For purposes of this subsection--
                    ``(A) In general.--The term `C-CPI-U' means 
                the Chained Consumer Price Index for All Urban 
                Consumers (as published by the Bureau of Labor 
                Statistics of the Department of Labor). The 
                values of the Chained Consumer Price Index for 
                All Urban Consumers taken into account for 
                purposes of determining the cost-of-living 
                adjustment for any calendar year under this 
                subsection shall be the latest values so 
                published as of the date on which such Bureau 
                publishes the initial value of the Chained 
                Consumer Price Index for All Urban Consumers 
                for the month of August for the preceding 
                calendar year.
                    ``(B) Determination for calendar year.--The 
                C-CPI-U for any calendar year is the average of 
                the C-CPI-U as of the close of the 12-month 
                period ending on August 31 of such calendar 
                year.''.
    (c) Application to Permanent Tax Tables.--
            (1) In general.--Section 1(f)(2)(A) is amended to 
        read as follows:
                    ``(A) except as provided in paragraph (8), 
                by increasing the minimum and maximum dollar 
                amounts for each bracket for which a tax is 
                imposed under such table by the cost-of-living 
                adjustment for such calendar year, determined--
                            ``(i) except as provided in clause 
                        (ii), by substituting `1992' for `2016' 
                        in paragraph (3)(A)(ii), and
                            ``(ii) in the case of adjustments 
                        to the dollar amounts at which the 36 
                        percent rate bracket begins or at which 
                        the 39.6 percent rate bracket begins, 
                        by substituting `1993' for `2016' in 
                        paragraph (3)(A)(ii),''.
            (2) Conforming amendments.--Section 1(i) is 
        amended--
                    (A) by striking ``for `1992' in 
                subparagraph (B)'' in paragraph (1)(C) and 
                inserting ``for `2016' in subparagraph 
                (A)(ii)'', and
                    (B) by striking ``subsection (f)(3)(B) 
                shall be applied by substituting `2012' for 
                `1992''' in paragraph (3)(C) and inserting 
                ``subsection (f)(3)(A)(ii) shall be applied by 
                substituting `2012' for `2016'''.
    (d) Application to Other Internal Revenue Code of 1986 
Provisions.--
            (1) The following sections are each amended by 
        striking ``for `calendar year 1992' in subparagraph 
        (B)'' and inserting ``for `calendar year 2016' in 
        subparagraph (A)(ii)'':
                    (A) Section 23(h)(2).
                    (B) Paragraphs (1)(A)(ii) and (2)(A)(ii) of 
                section 25A(h).
                    (C) Section 25B(b)(3)(B).
                    (D) Subsection (b)(2)(B)(ii)(II), and 
                clauses (i) and (ii) of subsection (j)(1)(B), 
                of section 32.
                    (E) Section 36B(f)(2)(B)(ii)(II).
                    (F) Section 41(e)(5)(C)(i).
                    (G) Subsections (e)(3)(D)(ii) and 
                (h)(3)(H)(i)(II) of section 42.
                    (H) Section 45R(d)(3)(B)(ii).
                    (I) Section 55(d)(4)(A)(ii).
                    (J) Section 62(d)(3)(B).
                    (K) Section 63(c)(4)(B).
                    (L) Section 125(i)(2)(B).
                    (M) Section 135(b)(2)(B)(ii).
                    (N) Section 137(f)(2).
                    (O) Section 146(d)(2)(B).
                    (P) Section 147(c)(2)(H)(ii).
                    (Q) Section 151(d)(4)(B).
                    (R) Section 179(b)(6)(A)(ii).
                    (S) Subsections (b)(5)(C)(i)(II) and 
                (g)(8)(B) of section 219.
                    (T) Section 220(g)(2).
                    (U) Section 221(f)(1)(B).
                    (V) Section 223(g)(1)(B).
                    (W) Section 408A(c)(3)(D)(ii).
                    (X) Section 430(c)(7)(D)(vii)(II).
                    (Y) Section 512(d)(2)(B).
                    (Z) Section 513(h)(2)(C)(ii).
                    (AA) Section 831(b)(2)(D)(ii).
                    (BB) Section 877A(a)(3)(B)(i)(II).
                    (CC) Section 2010(c)(3)(B)(ii).
                    (DD) Section 2032A(a)(3)(B).
                    (EE) Section 2503(b)(2)(B).
                    (FF) Section 4261(e)(4)(A)(ii).
                    (GG) Section 5000A(c)(3)(D)(ii).
                    (HH) Section 6323(i)(4)(B).
                    (II) Section 6334(g)(1)(B).
                    (JJ) Section 6601(j)(3)(B).
                    (KK) Section 6651(i)(1).
                    (LL) Section 6652(c)(7)(A).
                    (MM) Section 6695(h)(1).
                    (NN) Section 6698(e)(1).
                    (OO) Section 6699(e)(1).
                    (PP) Section 6721(f)(1).
                    (QQ) Section 6722(f)(1).
                    (RR) Section 7345(f)(2).
                    (SS) Section 7430(c)(1).
                    (TT) Section 9831(d)(2)(D)(ii)(II).
            (2) Sections 41(e)(5)(C)(ii) and 68(b)(2)(B) are 
        each amended--
                    (A) by striking ``1(f)(3)(B)'' and 
                inserting ``1(f)(3)(A)(ii)'', and
                    (B) by striking ``1992'' and inserting 
                ``2016''.
            (3) Section 42(h)(6)(G) is amended--
                    (A) by striking ``for `calendar year 
                1987''' in clause (i)(II) and inserting ``for 
                `calendar year 2016' in subparagraph (A)(ii) 
                thereof'', and
                    (B) by striking ``if the CPI for any 
                calendar year'' and all that follows in clause 
                (ii) and inserting ``if the C-CPI-U for any 
                calendar year (as defined in section 1(f)(6)) 
                exceeds the C-CPI-U for the preceding calendar 
                year by more than 5 percent, the C-CPI-U for 
                the base calendar year shall be increased such 
                that such excess shall never be taken into 
                account under clause (i). In the case of a base 
                calendar year before 2017, the C-CPI-U for such 
                year shall be determined by multiplying the CPI 
                for such year by the amount determined under 
                section 1(f)(3)(B).''.
            (4) Section 59(j)(2)(B) is amended by striking 
        ``for `1992' in subparagraph (B)'' and inserting ``for 
        `2016' in subparagraph (A)(ii)''.
            (5) Section 132(f)(6)(A)(ii) is amended by striking 
        ``for `calendar year 1992''' and inserting ``for 
        `calendar year 2016' in subparagraph (A)(ii) thereof''.
            (6) Section 162(o)(3) is amended by striking 
        ``adjusted for changes in the Consumer Price Index (as 
        defined in section 1(f)(5)) since 1991'' and inserting 
        ``adjusted by increasing any such amount under the 1991 
        agreement by an amount equal to--
                    ``(A) such amount, multiplied by
                    ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for the 
                calendar year in which the taxable year begins, 
                by substituting `calendar year 1990' for 
                `calendar year 2016' in subparagraph (A)(ii) 
                thereof''.
            (7) So much of clause (ii) of section 213(d)(10)(B) 
        as precedes the last sentence is amended to read as 
        follows:
                            ``(ii) Medical care cost 
                        adjustment.--For purposes of clause 
                        (i), the medical care cost adjustment 
                        for any calendar year is the percentage 
                        (if any) by which--
                                    ``(I) the medical care 
                                component of the C-CPI-U (as 
                                defined in section 1(f)(6)) for 
                                August of the preceding 
                                calendar year, exceeds
                                    ``(II) such component of 
                                the CPI (as defined in section 
                                1(f)(4)) for August of 1996, 
                                multiplied by the amount 
                                determined under section 
                                1(f)(3)(B).''.
            (8) Subparagraph (B) of section 280F(d)(7) is 
        amended to read as follows:
                    ``(B) Automobile price inflation 
                adjustment.--For purposes of this paragraph--
                            ``(i) In general.--The automobile 
                        price inflation adjustment for any 
                        calendar year is the percentage (if 
                        any) by which--
                                    ``(I) the C-CPI-U 
                                automobile component for 
                                October of the preceding 
                                calendar year, exceeds
                                    ``(II) the automobile 
                                component of the CPI (as 
                                defined in section 1(f)(4)) for 
                                October of 1987, multiplied by 
                                the amount determined under 
                                1(f)(3)(B).
                            ``(ii) C-CPI-U automobile 
                        component.--The term `C-CPI-U 
                        automobile component' means the 
                        automobile component of the Chained 
                        Consumer Price Index for All Urban 
                        Consumers (as described in section 
                        1(f)(6)).''.
            (9) Section 911(b)(2)(D)(ii)(II) is amended by 
        striking ``for `1992' in subparagraph (B)'' and 
        inserting ``for `2016' in subparagraph (A)(ii)''.
            (10) Paragraph (2) of section 1274A(d) is amended 
        to read as follows:
            ``(2) Adjustment for inflation.--In the case of any 
        debt instrument arising out of a sale or exchange 
        during any calendar year after 1989, each dollar amount 
        contained in the preceding provisions of this section 
        shall be increased by an amount equal to--
                    ``(A) such amount, multiplied by
                    ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for the 
                calendar year in which the taxable year begins, 
                by substituting `calendar year 1988' for 
                `calendar year 2016' in subparagraph (A)(ii) 
                thereof.
        Any increase under the preceding sentence shall be 
        rounded to the nearest multiple of $100 (or, if such 
        increase is a multiple of $50, such increase shall be 
        increased to the nearest multiple of $100).''.
            (11) Section 4161(b)(2)(C)(i)(II) is amended by 
        striking ``for `1992' in subparagraph (B)'' and 
        inserting ``for `2016' in subparagraph (A)(ii)''.
            (12) Section 4980I(b)(3)(C)(v)(II) is amended by 
        striking ``for `1992' in subparagraph (B)'' and 
        inserting ``for `2016' in subparagraph (A)(ii)''.
            (13) Section 6039F(d) is amended by striking 
        ``subparagraph (B) thereof shall be applied by 
        substituting `1995' for `1992''' and inserting 
        ``subparagraph (A)(ii) thereof shall be applied by 
        substituting `1995' for `2016'''.
            (14) Section 7872(g)(5) is amended to read as 
        follows:
            ``(5) Adjustment of limit for inflation.--In the 
        case of any loan made during any calendar year after 
        1986, the dollar amount in paragraph (2) shall be 
        increased by an amount equal to--
                    ``(A) such amount, multiplied by
                    ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for the 
                calendar year in which the taxable year begins, 
                by substituting `calendar year 1985' for 
                `calendar year 2016' in subparagraph (A)(ii) 
                thereof.
        Any increase under the preceding sentence shall be 
        rounded to the nearest multiple of $100 (or, if such 
        increase is a multiple of $50, such increase shall be 
        increased to the nearest multiple of $100).''.
    (e) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

 PART II--DEDUCTION FOR QUALIFIED BUSINESS INCOME OF PASS-THRU ENTITIES

SEC. 11011. DEDUCTION FOR QUALIFIED BUSINESS INCOME.

    (a) In General.--Part VI of subchapter B of chapter 1 is 
amended by adding at the end the following new section:

``SEC. 199A. QUALIFIED BUSINESS INCOME.

    ``(a) In General.--In the case of a taxpayer other than a 
corporation, there shall be allowed as a deduction for any 
taxable year an amount equal to the sum of--
            ``(1) the lesser of--
                    ``(A) the combined qualified business 
                income amount of the taxpayer, or
                    ``(B) an amount equal to 20 percent of the 
                excess (if any) of--
                            ``(i) the taxable income of the 
                        taxpayer for the taxable year, over
                            ``(ii) the sum of any net capital 
                        gain (as defined in section 1(h)), plus 
                        the aggregate amount of the qualified 
                        cooperative dividends, of the taxpayer 
                        for the taxable year, plus
            ``(2) the lesser of--
                    ``(A) 20 percent of the aggregate amount of 
                the qualified cooperative dividends of the 
                taxpayer for the taxable year, or
                    ``(B) taxable income (reduced by the net 
                capital gain (as so defined)) of the taxpayer 
                for the taxable year.
The amount determined under the preceding sentence shall not 
exceed the taxable income (reduced by the net capital gain (as 
so defined)) of the taxpayer for the taxable year.
    ``(b) Combined Qualified Business Income Amount.--For 
purposes of this section--
            ``(1) In general.--The term `combined qualified 
        business income amount' means, with respect to any 
        taxable year, an amount equal to--
                    ``(A) the sum of the amounts determined 
                under paragraph (2) for each qualified trade or 
                business carried on by the taxpayer, plus
                    ``(B) 20 percent of the aggregate amount of 
                the qualified REIT dividends and qualified 
                publicly traded partnership income of the 
                taxpayer for the taxable year.
            ``(2) Determination of deductible amount for each 
        trade or business.--The amount determined under this 
        paragraph with respect to any qualified trade or 
        business is the lesser of--
                    ``(A) 20 percent of the taxpayer's 
                qualified business income with respect to the 
                qualified trade or business, or
                    ``(B) the greater of--
                            ``(i) 50 percent of the W-2 wages 
                        with respect to the qualified trade or 
                        business, or
                            ``(ii) the sum of 25 percent of the 
                        W-2 wages with respect to the qualified 
                        trade or business, plus 2.5 percent of 
                        the unadjusted basis immediately after 
                        acquisition of all qualified property.
            ``(3) Modifications to limit based on taxable 
        income.--
                    ``(A) Exception from limit.--In the case of 
                any taxpayer whose taxable income for the 
                taxable year does not exceed the threshold 
                amount, paragraph (2) shall be applied without 
                regard to subparagraph (B).
                    ``(B) Phase-in of limit for certain 
                taxpayers.--
                            ``(i) In general.--If--
                                    ``(I) the taxable income of 
                                a taxpayer for any taxable year 
                                exceeds the threshold amount, 
                                but does not exceed the sum of 
                                the threshold amount plus 
                                $50,000 ($100,000 in the case 
                                of a joint return), and
                                    ``(II) the amount 
                                determined under paragraph 
                                (2)(B) (determined without 
                                regard to this subparagraph) 
                                with respect to any qualified 
                                trade or business carried on by 
                                the taxpayer is less than the 
                                amount determined under 
                                paragraph (2)(A) with respect 
                                such trade or business,
                        then paragraph (2) shall be applied 
                        with respect to such trade or business 
                        without regard to subparagraph (B) 
                        thereof and by reducing the amount 
                        determined under subparagraph (A) 
                        thereof by the amount determined under 
                        clause (ii).
                            ``(ii) Amount of reduction.--The 
                        amount determined under this 
                        subparagraph is the amount which bears 
                        the same ratio to the excess amount 
                        as--
                                    ``(I) the amount by which 
                                the taxpayer's taxable income 
                                for the taxable year exceeds 
                                the threshold amount, bears to
                                    ``(II) $50,000 ($100,000 in 
                                the case of a joint return).
                            ``(iii) Excess amount.--For 
                        purposes of clause (ii), the excess 
                        amount is the excess of--
                                    ``(I) the amount determined 
                                under paragraph (2)(A) 
                                (determined without regard to 
                                this paragraph), over
                                    ``(II) the amount 
                                determined under paragraph 
                                (2)(B) (determined without 
                                regard to this paragraph).
            ``(4) Wages, etc.--
                    ``(A) In general.--The term `W-2 wages' 
                means, with respect to any person for any 
                taxable year of such person, the amounts 
                described in paragraphs (3) and (8) of section 
                6051(a) paid by such person with respect to 
                employment of employees by such person during 
                the calendar year ending during such taxable 
                year.
                    ``(B) Limitation to wages attributable to 
                qualified business income.--Such term shall not 
                include any amount which is not properly 
                allocable to qualified business income for 
                purposes of subsection (c)(1).
                    ``(C) Return requirement.--Such term shall 
                not include any amount which is not properly 
                included in a return filed with the Social 
                Security Administration on or before the 60th 
                day after the due date (including extensions) 
                for such return.
            ``(5) Acquisitions, dispositions, and short taxable 
        years.--The Secretary shall provide for the application 
        of this subsection in cases of a short taxable year or 
        where the taxpayer acquires, or disposes of, the major 
        portion of a trade or business or the major portion of 
        a separate unit of a trade or business during the 
        taxable year.
            ``(6) Qualified property.--For purposes of this 
        section:
                    ``(A) In general.--The term `qualified 
                property' means, with respect to any qualified 
                trade or business for a taxable year, tangible 
                property of a character subject to the 
                allowance for depreciation under section 167--
                            ``(i) which is held by, and 
                        available for use in, the qualified 
                        trade or business at the close of the 
                        taxable year,
                            ``(ii) which is used at any point 
                        during the taxable year in the 
                        production of qualified business 
                        income, and
                            ``(iii) the depreciable period for 
                        which has not ended before the close of 
                        the taxable year.
                    ``(B) Depreciable period.--The term 
                `depreciable period' means, with respect to 
                qualified property of a taxpayer, the period 
                beginning on the date the property was first 
                placed in service by the taxpayer and ending on 
                the later of--
                            ``(i) the date that is 10 years 
                        after such date, or
                            ``(ii) the last day of the last 
                        full year in the applicable recovery 
                        period that would apply to the property 
                        under section 168 (determined without 
                        regard to subsection (g) thereof).
    ``(c) Qualified Business Income.--For purposes of this 
section--
            ``(1) In general.--The term `qualified business 
        income' means, for any taxable year, the net amount of 
        qualified items of income, gain, deduction, and loss 
        with respect to any qualified trade or business of the 
        taxpayer. Such term shall not include any qualified 
        REIT dividends, qualified cooperative dividends, or 
        qualified publicly traded partnership income.
            ``(2) Carryover of losses.--If the net amount of 
        qualified income, gain, deduction, and loss with 
        respect to qualified trades or businesses of the 
        taxpayer for any taxable year is less than zero, such 
        amount shall be treated as a loss from a qualified 
        trade or business in the succeeding taxable year.
            ``(3) Qualified items of income, gain, deduction, 
        and loss.--For purposes of this subsection--
                    ``(A) In general.--The term `qualified 
                items of income, gain, deduction, and loss' 
                means items of income, gain, deduction, and 
                loss to the extent such items are--
                            ``(i) effectively connected with 
                        the conduct of a trade or business 
                        within the United States (within the 
                        meaning of section 864(c), determined 
                        by substituting `qualified trade or 
                        business (within the meaning of section 
                        199A)' for `nonresident alien 
                        individual or a foreign corporation' or 
                        for `a foreign corporation' each place 
                        it appears), and
                            ``(ii) included or allowed in 
                        determining taxable income for the 
                        taxable year.
                    ``(B) Exceptions.--The following investment 
                items shall not be taken into account as a 
                qualified item of income, gain, deduction, or 
                loss:
                            ``(i) Any item of short-term 
                        capital gain, short-term capital loss, 
                        long-term capital gain, or long-term 
                        capital loss.
                            ``(ii) Any dividend, income 
                        equivalent to a dividend, or payment in 
                        lieu of dividends described in section 
                        954(c)(1)(G).
                            ``(iii) Any interest income other 
                        than interest income which is properly 
                        allocable to a trade or business.
                            ``(iv) Any item of gain or loss 
                        described in subparagraph (C) or (D) of 
                        section 954(c)(1) (applied by 
                        substituting `qualified trade or 
                        business' for `controlled foreign 
                        corporation').
                            ``(v) Any item of income, gain, 
                        deduction, or loss taken into account 
                        under section 954(c)(1)(F) (determined 
                        without regard to clause (ii) thereof 
                        and other than items attributable to 
                        notional principal contracts entered 
                        into in transactions qualifying under 
                        section 1221(a)(7)).
                            ``(vi) Any amount received from an 
                        annuity which is not received in 
                        connection with the trade or business.
                            ``(vii) Any item of deduction or 
                        loss properly allocable to an amount 
                        described in any of the preceding 
                        clauses.
            ``(4) Treatment of reasonable compensation and 
        guaranteed payments.--Qualified business income shall 
        not include--
                    ``(A) reasonable compensation paid to the 
                taxpayer by any qualified trade or business of 
                the taxpayer for services rendered with respect 
                to the trade or business,
                    ``(B) any guaranteed payment described in 
                section 707(c) paid to a partner for services 
                rendered with respect to the trade or business, 
                and
                    ``(C) to the extent provided in 
                regulations, any payment described in section 
                707(a) to a partner for services rendered with 
                respect to the trade or business.
    ``(d) Qualified Trade or Business.--For purposes of this 
section--
            ``(1) In general.--The term `qualified trade or 
        business' means any trade or business other than--
                    ``(A) a specified service trade or 
                business, or
                    ``(B) the trade or business of performing 
                services as an employee.
            ``(2) Specified service trade or business.--The 
        term `specified service trade or business' means any 
        trade or business--
                    ``(A) which is described in section 
                1202(e)(3)(A) (applied without regard to the 
                words `engineering, architecture,') or which 
                would be so described if the term `employees or 
                owners' were substituted for `employees' 
                therein, or
                    ``(B) which involves the performance of 
                services that consist of investing and 
                investment management, trading, or dealing in 
                securities (as defined in section 475(c)(2)), 
                partnership interests, or commodities (as 
                defined in section 475(e)(2)).
            ``(3) Exception for specified service businesses 
        based on taxpayer's income.--
                    ``(A) In general.--If, for any taxable 
                year, the taxable income of any taxpayer is 
                less than the sum of the threshold amount plus 
                $50,000 ($100,000 in the case of a joint 
                return), then--
                            ``(i) any specified service trade 
                        or business of the taxpayer shall not 
                        fail to be treated as a qualified trade 
                        or business due to paragraph (1)(A), 
                        but
                            ``(ii) only the applicable 
                        percentage of qualified items of 
                        income, gain, deduction, or loss, and 
                        the W-2 wages and the unadjusted basis 
                        immediately after acquisition of 
                        qualified property, of the taxpayer 
                        allocable to such specified service 
                        trade or business shall be taken into 
                        account in computing the qualified 
                        business income, W-2 wages, and the 
                        unadjusted basis immediately after 
                        acquisition of qualified property of 
                        the taxpayer for the taxable year for 
                        purposes of applying this section.
                    ``(B) Applicable percentage.--For purposes 
                of subparagraph (A), the term `applicable 
                percentage' means, with respect to any taxable 
                year, 100 percent reduced (not below zero) by 
                the percentage equal to the ratio of--
                            ``(i) the taxable income of the 
                        taxpayer for the taxable year in excess 
                        of the threshold amount, bears to
                            ``(ii) $50,000 ($100,000 in the 
                        case of a joint return).
    ``(e) Other Definitions.--For purposes of this section--
            ``(1) Taxable income.--Taxable income shall be 
        computed without regard to the deduction allowable 
        under this section.
            ``(2) Threshold amount.--
                    ``(A) In general.--The term `threshold 
                amount' means $157,500 (200 percent of such 
                amount in the case of a joint return).
                    ``(B) Inflation adjustment.--In the case of 
                any taxable year beginning after 2018, the 
                dollar amount in subparagraph (A) shall be 
                increased by an amount equal to--
                            ``(i) such dollar amount, 
                        multiplied by
                            ``(ii) the cost-of-living 
                        adjustment determined under section 
                        1(f)(3) for the calendar year in which 
                        the taxable year begins, determined by 
                        substituting `calendar year 2017' for 
                        `calendar year 2016' in subparagraph 
                        (A)(ii) thereof.
                The amount of any increase under the preceding 
                sentence shall be rounded as provided in 
                section 1(f)(7).
            ``(3) Qualified reit dividend.--The term `qualified 
        REIT dividend' means any dividend from a real estate 
        investment trust received during the taxable year 
        which--
                    ``(A) is not a capital gain dividend, as 
                defined in section 857(b)(3), and
                    ``(B) is not qualified dividend income, as 
                defined in section 1(h)(11).
            ``(4) Qualified cooperative dividend.--The term 
        `qualified cooperative dividend' means any patronage 
        dividend (as defined in section 1388(a)), any per-unit 
        retain allocation (as defined in section 1388(f)), and 
        any qualified written notice of allocation (as defined 
        in section 1388(c)), or any similar amount received 
        from an organization described in subparagraph (B)(ii), 
        which--
                    ``(A) is includible in gross income, and
                    ``(B) is received from--
                            ``(i) an organization or 
                        corporation described in section 
                        501(c)(12) or 1381(a), or
                            ``(ii) an organization which is 
                        governed under this title by the rules 
                        applicable to cooperatives under this 
                        title before the enactment of 
                        subchapter T.
            ``(5) Qualified publicly traded partnership 
        income.--The term `qualified publicly traded 
        partnership income' means, with respect to any 
        qualified trade or business of a taxpayer, the sum of--
                    ``(A) the net amount of such taxpayer's 
                allocable share of each qualified item of 
                income, gain, deduction, and loss (as defined 
                in subsection (c)(3) and determined after the 
                application of subsection (c)(4)) from a 
                publicly traded partnership (as defined in 
                section 7704(a)) which is not treated as a 
                corporation under section 7704(c), plus
                    ``(B) any gain recognized by such taxpayer 
                upon disposition of its interest in such 
                partnership to the extent such gain is treated 
                as an amount realized from the sale or exchange 
                of property other than a capital asset under 
                section 751(a).
    ``(f) Special Rules.--
            ``(1) Application to partnerships and s 
        corporations.--
                    ``(A) In general.--In the case of a 
                partnership or S corporation--
                            ``(i) this section shall be applied 
                        at the partner or shareholder level,
                            ``(ii) each partner or shareholder 
                        shall take into account such person's 
                        allocable share of each qualified item 
                        of income, gain, deduction, and loss, 
                        and
                            ``(iii) each partner or shareholder 
                        shall be treated for purposes of 
                        subsection (b) as having W-2 wages and 
                        unadjusted basis immediately after 
                        acquisition of qualified property for 
                        the taxable year in an amount equal to 
                        such person's allocable share of the W-
                        2 wages and the unadjusted basis 
                        immediately after acquisition of 
                        qualified property of the partnership 
                        or S corporation for the taxable year 
                        (as determined under regulations 
                        prescribed by the Secretary).
                For purposes of clause (iii), a partner's or 
                shareholder's allocable share of W-2 wages 
                shall be determined in the same manner as the 
                partner's or shareholder's allocable share of 
                wage expenses. For purposes of such clause, 
                partner's or shareholder's allocable share of 
                the unadjusted basis immediately after 
                acquisition of qualified property shall be 
                determined in the same manner as the partner's 
                or shareholder's allocable share of 
                depreciation. For purposes of this 
                subparagraph, in the case of an S corporation, 
                an allocable share shall be the shareholder's 
                pro rata share of an item.
                    ``(B) Application to trusts and estates.--
                Rules similar to the rules under section 
                199(d)(1)(B)(i) (as in effect on December 1, 
                2017) for the apportionment of W-2 wages shall 
                apply to the apportionment of W-2 wages and the 
                apportionment of unadjusted basis immediately 
                after acquisition of qualified property under 
                this section.
                    ``(C) Treatment of trades or business in 
                puerto rico.--
                            ``(i) In general.--In the case of 
                        any taxpayer with qualified business 
                        income from sources within the 
                        commonwealth of Puerto Rico, if all 
                        such income is taxable under section 1 
                        for such taxable year, then for 
                        purposes of determining the qualified 
                        business income of such taxpayer for 
                        such taxable year, the term `United 
                        States' shall include the Commonwealth 
                        of Puerto Rico.
                            ``(ii) Special rule for applying 
                        limit.--In the case of any taxpayer 
                        described in clause (i), the 
                        determination of W-2 wages of such 
                        taxpayer with respect to any qualified 
                        trade or business conducted in Puerto 
                        Rico shall be made without regard to 
                        any exclusion under section 3401(a)(8) 
                        for remuneration paid for services in 
                        Puerto Rico.
            ``(2) Coordination with minimum tax.--For purposes 
        of determining alternative minimum taxable income under 
        section 55, qualified business income shall be 
        determined without regard to any adjustments under 
        sections 56 through 59.
            ``(3) Deduction limited to income taxes.--The 
        deduction under subsection (a) shall only be allowed 
        for purposes of this chapter.
            ``(4) Regulations.--The Secretary shall prescribe 
        such regulations as are necessary to carry out the 
        purposes of this section, including regulations--
                    ``(A) for requiring or restricting the 
                allocation of items and wages under this 
                section and such reporting requirements as the 
                Secretary determines appropriate, and
                    ``(B) for the application of this section 
                in the case of tiered entities.
    ``(g) Deduction Allowed to Specified Agricultural or 
Horticultural Cooperatives.--
            ``(1) In general.--In the case of any taxable year 
        of a specified agricultural or horticultural 
        cooperative beginning after December 31, 2017, there 
        shall be allowed a deduction in an amount equal to the 
        lesser of--
                    ``(A) 20 percent of the excess (if any) 
                of--
                            ``(i) the gross income of a 
                        specified agricultural or horticultural 
                        cooperative, over
                            ``(ii) the qualified cooperative 
                        dividends (as defined in subsection 
                        (e)(4)) paid during the taxable year 
                        for the taxable year, or
                    ``(B) the greater of--
                            ``(i) 50 percent of the W-2 wages 
                        of the cooperative with respect to its 
                        trade or business, or
                            ``(ii) the sum of 25 percent of the 
                        W-2 wages of the cooperative with 
                        respect to its trade or business, plus 
                        2.5 percent of the unadjusted basis 
                        immediately after acquisition of all 
                        qualified property of the cooperative.
            ``(2) Limitation.--The amount determined under 
        paragraph (1) shall not exceed the taxable income of 
        the specified agricultural or horticultural for the 
        taxable year.
            ``(3) Specified agricultural or horticultural 
        cooperative.--For purposes of this subsection, the term 
        `specified agricultural or horticultural cooperative' 
        means an organization to which part I of subchapter T 
        applies which is engaged in--
                    ``(A) the manufacturing, production, 
                growth, or extraction in whole or significant 
                part of any agricultural or horticultural 
                product,
                    ``(B) the marketing of agricultural or 
                horticultural products which its patrons have 
                so manufactured, produced, grown, or extracted, 
                or
                    ``(C) the provision of supplies, equipment, 
                or services to farmers or to organizations 
                described in subparagraph (A) or (B).
    ``(h) Anti-abuse Rules.--The Secretary shall--
            ``(1) apply rules similar to the rules under 
        section 179(d)(2) in order to prevent the manipulation 
        of the depreciable period of qualified property using 
        transactions between related parties, and
            ``(2) prescribe rules for determining the 
        unadjusted basis immediately after acquisition of 
        qualified property acquired in like-kind exchanges or 
        involuntary conversions.
    ``(i) Termination.--This section shall not apply to taxable 
years beginning after December 31, 2025.''.
    (b) Treatment of Deduction in Computing Adjusted Gross and 
Taxable Income.--
            (1) Deduction not allowed in computing adjusted 
        gross income.--Section 62(a) is amended by adding at 
        the end the following new sentence: ``The deduction 
        allowed by section 199A shall not be treated as a 
        deduction described in any of the preceding paragraphs 
        of this subsection.''.
            (2) Deduction allowed to nonitemizers.--Section 
        63(b) is amended by striking ``and'' at the end of 
        paragraph (1), by striking the period at the end of 
        paragraph (2) and inserting ``, and'', and by adding at 
        the end the following new paragraph:
            ``(3) the deduction provided in section 199A.''.
            (3) Deduction allowed to itemizers without limits 
        on itemized deductions.--Section 63(d) is amended by 
        striking ``and'' at the end of paragraph (1), by 
        striking the period at the end of paragraph (2) and 
        inserting ``, and'', and by adding at the end the 
        following new paragraph:
            ``(3) the deduction provided in section 199A.''.
            (4) Conforming amendment.--Section 3402(m)(1) is 
        amended by inserting ``and the estimated deduction 
        allowed under section 199A'' after ``chapter 1''.
    (c) Accuracy-related Penalty on Determination of Applicable 
Percentage.--Section 6662(d)(1) is amended by inserting at the 
end the following new subparagraph:
                    ``(C) Special rule for taxpayers claiming 
                section 199a deduction.--In the case of any 
                taxpayer who claims the deduction allowed under 
                section 199A for the taxable year, subparagraph 
                (A) shall be applied by substituting `5 
                percent' for `10 percent'.''.
    (d) Conforming Amendments.--
            (1) Section 172(d) is amended by adding at the end 
        the following new paragraph:
            ``(8) Qualified business income deduction.--The 
        deduction under section 199A shall not be allowed.''.
            (2) Section 246(b)(1) is amended by inserting 
        ``199A,'' before ``243(a)(1)''.
            (3) Section 613(a) is amended by inserting ``and 
        without the deduction under section 199A'' after ``and 
        without the deduction under section 199''.
            (4) Section 613A(d)(1) is amended by redesignating 
        subparagraphs (C), (D), and (E) as subparagraphs (D), 
        (E), and (F), respectively, and by inserting after 
        subparagraph (B), the following new subparagraph:
                    ``(C) any deduction allowable under section 
                199A,''.
            (5) Section 170(b)(2)(D) is amended by striking 
        ``and'' in clause (iv), by striking the period at the 
        end of clause (v), and by adding at the end the 
        following new clause:
                            ``(vi) section 199A(g).''.
            (6) The table of sections for part VI of subchapter 
        B of chapter 1 is amended by inserting at the end the 
        following new item:

``Sec. 199A. Qualified business income.''.

    (e) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 11012. LIMITATION ON LOSSES FOR TAXPAYERS OTHER THAN CORPORATIONS.

    (a) In General.--Section 461 is amended by adding at the 
end the following new subsection:
    ``(l) Limitation on Excess Business Losses of Noncorporate 
Taxpayers.--
            ``(1) Limitation.--In the case of taxable year of a 
        taxpayer other than a corporation beginning after 
        December 31, 2017, and before January 1, 2026--
                    ``(A) subsection (j) (relating to 
                limitation on excess farm losses of certain 
                taxpayers) shall not apply, and
                    ``(B) any excess business loss of the 
                taxpayer for the taxable year shall not be 
                allowed.
            ``(2) Disallowed loss carryover.--Any loss which is 
        disallowed under paragraph (1) shall be treated as a 
        net operating loss carryover to the following taxable 
        year under section 172.
            ``(3) Excess business loss.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `excess 
                business loss' means the excess (if any) of--
                            ``(i) the aggregate deductions of 
                        the taxpayer for the taxable year which 
                        are attributable to trades or 
                        businesses of such taxpayer (determined 
                        without regard to whether or not such 
                        deductions are disallowed for such 
                        taxable year under paragraph (1)), over
                            ``(ii) the sum of--
                                    ``(I) the aggregate gross 
                                income or gain of such taxpayer 
                                for the taxable year which is 
                                attributable to such trades or 
                                businesses, plus
                                    ``(II) $250,000 (200 
                                percent of such amount in the 
                                case of a joint return).
                    ``(B) Adjustment for inflation.--In the 
                case of any taxable year beginning after 
                December 31, 2018, the $250,000 amount in 
                subparagraph (A)(ii)(II) shall be increased by 
                an amount equal to--
                            ``(i) such dollar amount, 
                        multiplied by
                            ``(ii) the cost-of-living 
                        adjustment determined under section 
                        1(f)(3) for the calendar year in which 
                        the taxable year begins, determined by 
                        substituting `2017' for `2016' in 
                        subparagraph (A)(ii) thereof.
                        If any amount as increased under the 
                        preceding sentence is not a multiple of 
                        $1,000, such amount shall be rounded to 
                        the nearest multiple of $1,000.
            ``(4) Application of subsection in case of 
        partnerships and s corporations.--In the case of a 
        partnership or S corporation--
                    ``(A) this subsection shall be applied at 
                the partner or shareholder level, and
                    ``(B) each partner's or shareholder's 
                allocable share of the items of income, gain, 
                deduction, or loss of the partnership or S 
                corporation for any taxable year from trades or 
                businesses attributable to the partnership or S 
                corporation shall be taken into account by the 
                partner or shareholder in applying this 
                subsection to the taxable year of such partner 
                or shareholder with or within which the taxable 
                year of the partnership or S corporation ends.
        For purposes of this paragraph, in the case of an S 
        corporation, an allocable share shall be the 
        shareholder's pro rata share of an item.
            ``(5) Additional reporting.--The Secretary shall 
        prescribe such additional reporting requirements as the 
        Secretary determines necessary to carry out the 
        purposes of this subsection.
            ``(6) Coordination with section 469.--This 
        subsection shall be applied after the application of 
        section 469.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

          PART III--TAX BENEFITS FOR FAMILIES AND INDIVIDUALS

SEC. 11021. INCREASE IN STANDARD DEDUCTION.

    (a) In General.--Subsection (c) of section 63 is amended by 
adding at the end the following new paragraph:
            ``(7) Special rules for taxable years 2018 through 
        2025.--In the case of a taxable year beginning after 
        December 31, 2017, and before January 1, 2026--
                    ``(A) Increase in standard deduction.--
                Paragraph (2) shall be applied--
                            ``(i) by substituting `$18,000' for 
                        `$4,400' in subparagraph (B), and
                            ``(ii) by substituting `$12,000' 
                        for `$3,000' in subparagraph (C).
                    ``(B) Adjustment for inflation.--
                            ``(i) In general.--Paragraph (4) 
                        shall not apply to the dollar amounts 
                        contained in paragraphs (2)(B) and 
                        (2)(C).
                            ``(ii) Adjustment of increased 
                        amounts.--In the case of a taxable year 
                        beginning after 2018, the $18,000 and 
                        $12,000 amounts in subparagraph (A) 
                        shall each be increased by an amount 
                        equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting `2017' for 
                                `2016' in subparagraph (A)(ii) 
                                thereof.
                        If any increase under this clause is 
                        not a multiple of $50, such increase 
                        shall be rounded to the next lowest 
                        multiple of $50.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 11022. INCREASE IN AND MODIFICATION OF CHILD TAX CREDIT.

    (a) In General.--Section 24 is amended by adding at the end 
the following new subsection:
    ``(h) Special Rules for Taxable Years 2018 Through 2025.--
            ``(1) In general.--In the case of a taxable year 
        beginning after December 31, 2017, and before January 
        1, 2026, this section shall be applied as provided in 
        paragraphs (2) through (7).
            ``(2) Credit amount.--Subsection (a) shall be 
        applied by substituting `$2,000' for `$1,000'.
            ``(3) Limitation.--In lieu of the amount determined 
        under subsection (b)(2), the threshold amount shall be 
        $400,000 in the case of a joint return ($200,000 in any 
        other case).
            ``(4) Partial credit allowed for certain other 
        dependents.--
                    ``(A) In general.--The credit determined 
                under subsection (a) (after the application of 
                paragraph (2)) shall be increased by $500 for 
                each dependent of the taxpayer (as defined in 
                section 152) other than a qualifying child 
                described in subsection (c).
                    ``(B) Exception for certain noncitizens.--
                Subparagraph (A) shall not apply with respect 
                to any individual who would not be a dependent 
                if subparagraph (A) of section 152(b)(3) were 
                applied without regard to all that follows 
                `resident of the United States'.
                    ``(C) Certain qualifying children.--In the 
                case of any qualifying child with respect to 
                whom a credit is not allowed under this section 
                by reason of paragraph (7), such child shall be 
                treated as a dependent to whom subparagraph (A) 
                applies.
            ``(5) Maximum amount of refundable credit.--
                    ``(A) In general.--The amount determined 
                under subsection (d)(1)(A) with respect to any 
                qualifying child shall not exceed $1,400, and 
                such subsection shall be applied without regard 
                to paragraph (4) of this subsection.
                    ``(B) Adjustment for inflation.--In the 
                case of a taxable year beginning after 2018, 
                the $1,400 amount in subparagraph (A) shall be 
                increased by an amount equal to--
                            ``(i) such dollar amount, 
                        multiplied by
                            ``(ii) the cost-of-living 
                        adjustment determined under section 
                        1(f)(3) for the calendar year in which 
                        the taxable year begins, determined by 
                        substituting `2017' for `2016' in 
                        subparagraph (A)(ii) thereof.
                If any increase under this clause is not a 
                multiple of $100, such increase shall be 
                rounded to the next lowest multiple of $100.
            ``(6) Earned income threshold for refundable 
        credit.--Subsection (d)(1)(B)(i) shall be applied by 
        substituting `$2,500' for `$3,000'.
            ``(7) Social security number required.--No credit 
        shall be allowed under this section to a taxpayer with 
        respect to any qualifying child unless the taxpayer 
        includes the social security number of such child on 
        the return of tax for the taxable year. For purposes of 
        the preceding sentence, the term `social security 
        number' means a social security number issued to an 
        individual by the Social Security Administration, but 
        only if the social security number is issued--
                    ``(A) to a citizen of the United States or 
                pursuant to subclause (I) (or that portion of 
                subclause (III) that relates to subclause (I)) 
                of section 205(c)(2)(B)(i) of the Social 
                Security Act, and
                    ``(B) before the due date for such 
                return.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 11023. INCREASED LIMITATION FOR CERTAIN CHARITABLE CONTRIBUTIONS.

    (a) In General.--Section 170(b)(1) is amended by 
redesignating subparagraph (G) as subparagraph (H) and by 
inserting after subparagraph (F) the following new 
subparagraph:
                    ``(G) Increased limitation for cash 
                contributions.--
                            ``(i) In general.--In the case of 
                        any contribution of cash to an 
                        organization described in subparagraph 
                        (A), the total amount of such 
                        contributions which may be taken into 
                        account under subsection (a) for any 
                        taxable year beginning after December 
                        31, 2017, and before January 1, 2026, 
                        shall not exceed 60 percent of the 
                        taxpayer's contribution base for such 
                        year.
                            ``(ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the applicable 
                        limitation under clause (i) for any 
                        taxable year described in such clause, 
                        such excess shall be treated (in a 
                        manner consistent with the rules of 
                        subsection (d)(1)) as a charitable 
                        contribution to which clause (i) 
                        applies in each of the 5 succeeding 
                        years in order of time.
                            ``(iii) Coordination with 
                        subparagraphs (a) and (b).--
                                    ``(I) In general.--
                                Contributions taken into 
                                account under this subparagraph 
                                shall not be taken into account 
                                under subparagraph (A).
                                    ``(II) Limitation 
                                reduction.--For each taxable 
                                year described in clause (i), 
                                and each taxable year to which 
                                any contribution under this 
                                subparagraph is carried over 
                                under clause (ii), subparagraph 
                                (A) shall be applied by 
                                reducing (but not below zero) 
                                the contribution limitation 
                                allowed for the taxable year 
                                under such subparagraph by the 
                                aggregate contributions allowed 
                                under this subparagraph for 
                                such taxable year, and 
                                subparagraph (B) shall be 
                                applied by treating any 
                                reference to subparagraph (A) 
                                as a reference to both 
                                subparagraph (A) and this 
                                subparagraph.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to contributions in taxable years beginning after 
December 31, 2017.

SEC. 11024. INCREASED CONTRIBUTIONS TO ABLE ACCOUNTS.

    (a) Increase in Limitation for Contributions From 
Compensation of Individuals With Disabilities.--
            (1) In general.--Section 529A(b)(2)(B) is amended 
        to read as follows:
                    ``(B) except in the case of contributions 
                under subsection (c)(1)(C), if such 
                contribution to an ABLE account would result in 
                aggregate contributions from all contributors 
                to the ABLE account for the taxable year 
                exceeding the sum of--
                            ``(i) the amount in effect under 
                        section 2503(b) for the calendar year 
                        in which the taxable year begins, plus
                            ``(ii) in the case of any 
                        contribution by a designated 
                        beneficiary described in paragraph (7) 
                        before January 1, 2026, the lesser of--
                                    ``(I) compensation (as 
                                defined by section 219(f)(1)) 
                                includible in the designated 
                                beneficiary's gross income for 
                                the taxable year, or
                                    ``(II) an amount equal to 
                                the poverty line for a one-
                                person household, as determined 
                                for the calendar year preceding 
                                the calendar year in which the 
                                taxable year begins.''.
            (2) Responsibility for contribution limitation.--
        Paragraph (2) of section 529A(b) is amended by adding 
        at the end the following: ``A designated beneficiary 
        (or a person acting on behalf of such beneficiary) 
        shall maintain adequate records for purposes of 
        ensuring, and shall be responsible for ensuring, that 
        the requirements of subparagraph (B)(ii) are met.''
            (3) Eligible designated beneficiary.--Section 
        529A(b) is amended by adding at the end the following:
            ``(7) Special rules related to contribution 
        limit.--For purposes of paragraph (2)(B)(ii)--
                    ``(A) Designated beneficiary.--A designated 
                beneficiary described in this paragraph is an 
                employee (including an employee within the 
                meaning of section 401(c)) with respect to 
                whom--
                            ``(i) no contribution is made for 
                        the taxable year to a defined 
                        contribution plan (within the meaning 
                        of section 414(i)) with respect to 
                        which the requirements of section 
                        401(a) or 403(a) are met,
                            ``(ii) no contribution is made for 
                        the taxable year to an annuity contract 
                        described in section 403(b), and
                            ``(iii) no contribution is made for 
                        the taxable year to an eligible 
                        deferred compensation plan described in 
                        section 457(b).
                    ``(B) Poverty line.--The term `poverty 
                line' has the meaning given such term by 
                section 673 of the Community Services Block 
                Grant Act (42 U.S.C. 9902).''.
    (b) Allowance of Saver's Credit for ABLE Contributions by 
Account Holder.--Section 25B(d)(1) is amended by striking 
``and'' at the end of subparagraph (B)(ii), by striking the 
period at the end of subparagraph (C) and inserting ``, and'', 
and by inserting at the end the following:
                    ``(D) the amount of contributions made 
                before January 1, 2026, by such individual to 
                the ABLE account (within the meaning of section 
                529A) of which such individual is the 
                designated beneficiary.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 11025. ROLLOVERS TO ABLE PROGRAMS FROM 529 PROGRAMS.

    (a) In General.--Clause (i) of section 529(c)(3)(C) is 
amended by striking ``or'' at the end of subclause (I), by 
striking the period at the end of subclause (II) and inserting 
``, or'', and by adding at the end the following:
                                    ``(III) before January 1, 
                                2026, to an ABLE account (as 
                                defined in section 529A(e)(6)) 
                                of the designated beneficiary 
                                or a member of the family of 
                                the designated beneficiary.
                        Subclause (III) shall not apply to so 
                        much of a distribution which, when 
                        added to all other contributions made 
                        to the ABLE account for the taxable 
                        year, exceeds the limitation under 
                        section 529A(b)(2)(B)(i).''.
    (b) Effective Date.--The amendments made by this section 
shall apply to distributions after the date of the enactment of 
this Act.

SEC. 11026. TREATMENT OF CERTAIN INDIVIDUALS PERFORMING SERVICES IN THE 
                    SINAI PENINSULA OF EGYPT.

    (a) In General.--For purposes of the following provisions 
of the Internal Revenue Code of 1986, with respect to the 
applicable period, a qualified hazardous duty area shall be 
treated in the same manner as if it were a combat zone (as 
determined under section 112 of such Code):
            (1) Section 2(a)(3) (relating to special rule where 
        deceased spouse was in missing status).
            (2) Section 112 (relating to the exclusion of 
        certain combat pay of members of the Armed Forces).
            (3) Section 692 (relating to income taxes of 
        members of Armed Forces on death).
            (4) Section 2201 (relating to members of the Armed 
        Forces dying in combat zone or by reason of combat-
        zone-incurred wounds, etc.).
            (5) Section 3401(a)(1) (defining wages relating to 
        combat pay for members of the Armed Forces).
            (6) Section 4253(d) (relating to the taxation of 
        phone service originating from a combat zone from 
        members of the Armed Forces).
            (7) Section 6013(f)(1) (relating to joint return 
        where individual is in missing status).
            (8) Section 7508 (relating to time for performing 
        certain acts postponed by reason of service in combat 
        zone).
    (b) Qualified Hazardous Duty Area.--For purposes of this 
section, the term ``qualified hazardous duty area'' means the 
Sinai Peninsula of Egypt, if as of the date of the enactment of 
this section any member of the Armed Forces of the United 
States is entitled to special pay under section 310 of title 
37, United States Code (relating to special pay; duty subject 
to hostile fire or imminent danger), for services performed in 
such location. Such term includes such location only during the 
period such entitlement is in effect.
    (c) Applicable Period.--
            (1) In general.--Except as provided in paragraph 
        (2), the applicable period is--
                    (A) the portion of the first taxable year 
                ending after June 9, 2015, which begins on such 
                date, and
                    (B) any subsequent taxable year beginning 
                before January 1, 2026.
            (2) Withholding.--In the case of subsection (a)(5), 
        the applicable period is--
                    (A) the portion of the first taxable year 
                ending after the date of the enactment of this 
                Act which begins on such date, and
                    (B) any subsequent taxable year beginning 
                before January 1, 2026.
    (d) Effective Date.--
            (1) In general.--Except as provided in paragraph 
        (2), the provisions of this section shall take effect 
        on June 9, 2015.
            (2) Withholding.--Subsection (a)(5) shall apply to 
        remuneration paid after the date of the enactment of 
        this Act.

SEC. 11027. TEMPORARY REDUCTION IN MEDICAL EXPENSE DEDUCTION FLOOR.

    (a) In General.--Subsection (f) of section 213 is amended 
to read as follows:
    ``(f) Special Rules for 2013 Through 2018.--In the case of 
any taxable year--
            ``(1) beginning after December 31, 2012, and ending 
        before January 1, 2017, in the case of a taxpayer if 
        such taxpayer or such taxpayer's spouse has attained 
        age 65 before the close of such taxable year, and
            ``(2) beginning after December 31, 2016, and ending 
        before January 1, 2019, in the case of any taxpayer,
subsection (a) shall be applied with respect to a taxpayer by 
substituting `7.5 percent' for `10 percent'.''.
    (b) Minimum Tax Preference Not to Apply.--Section 
56(b)(1)(B) is amended by adding at the end the following new 
sentence:``This subparagraph shall not apply to taxable years 
beginning after December 31, 2016, and ending before January 1, 
2019''.
    (c) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2016.

SEC. 11028. RELIEF FOR 2016 DISASTER AREAS.

    (a) In General.--For purposes of this section, the term 
``2016 disaster area'' means any area with respect to which a 
major disaster has been declared by the President under section 
401 of the Robert T. Stafford Disaster Relief and Emergency 
Assistance Act during calendar year 2016.
    (b) Special Rules for Use of Retirement Funds With Respect 
to Areas Damaged by 2016 Disasters.--
            (1) Tax-favored withdrawals from retirement 
        plans.--
                    (A) In general.--Section 72(t) of the 
                Internal Revenue Code of 1986 shall not apply 
                to any qualified 2016 disaster distribution.
                    (B) Aggregate dollar limitation.--
                            (i) In general.--For purposes of 
                        this subsection, the aggregate amount 
                        of distributions received by an 
                        individual which may be treated as 
                        qualified 2016 disaster distributions 
                        for any taxable year shall not exceed 
                        the excess (if any) of--
                                    (I) $100,000, over
                                    (II) the aggregate amounts 
                                treated as qualified 2016 
                                disaster distributions received 
                                by such individual for all 
                                prior taxable years.
                            (ii) Treatment of plan 
                        distributions.--If a distribution to an 
                        individual would (without regard to 
                        clause (i)) be a qualified 2016 
                        disaster distribution, a plan shall not 
                        be treated as violating any requirement 
                        of this title merely because the plan 
                        treats such distribution as a qualified 
                        2016 disaster distribution, unless the 
                        aggregate amount of such distributions 
                        from all plans maintained by the 
                        employer (and any member of any 
                        controlled group which includes the 
                        employer) to such individual exceeds 
                        $100,000.
                            (iii) Controlled group.--For 
                        purposes of clause (ii), the term 
                        ``controlled group'' means any group 
                        treated as a single employer under 
                        subsection (b), (c), (m), or (o) of 
                        section 414 of the Internal Revenue 
                        Code of 1986.
                    (C) Amount distributed may be repaid.--
                            (i) In general.--Any individual who 
                        receives a qualified 2016 disaster 
                        distribution may, at any time during 
                        the 3-year period beginning on the day 
                        after the date on which such 
                        distribution was received, make one or 
                        more contributions in an aggregate 
                        amount not to exceed the amount of such 
                        distribution to an eligible retirement 
                        plan of which such individual is a 
                        beneficiary and to which a rollover 
                        contribution of such distribution could 
                        be made under section 402(c), 
                        403(a)(4), 403(b)(8), 408(d)(3), or 
                        457(e)(16) of the Internal Revenue Code 
                        of 1986, as the case may be.
                            (ii) Treatment of repayments of 
                        distributions from eligible retirement 
                        plans other than iras.--For purposes of 
                        the Internal Revenue Code of 1986, if a 
                        contribution is made pursuant to clause 
                        (i) with respect to a qualified 2016 
                        disaster distribution from an eligible 
                        retirement plan other than an 
                        individual retirement plan, then the 
                        taxpayer shall, to the extent of the 
                        amount of the contribution, be treated 
                        as having received the qualified 2016 
                        disaster distribution in an eligible 
                        rollover distribution (as defined in 
                        section 402(c)(4) of the Internal 
                        Revenue Code of 1986) and as having 
                        transferred the amount to the eligible 
                        retirement plan in a direct trustee to 
                        trustee transfer within 60 days of the 
                        distribution.
                            (iii) Treatment of repayments for 
                        distributions from iras.--For purposes 
                        of the Internal Revenue Code of 1986, 
                        if a contribution is made pursuant to 
                        clause (i) with respect to a qualified 
                        2016 disaster distribution from an 
                        individual retirement plan (as defined 
                        by section 7701(a)(37) of the Internal 
                        Revenue Code of 1986), then, to the 
                        extent of the amount of the 
                        contribution, the qualified 2016 
                        disaster distribution shall be treated 
                        as a distribution described in section 
                        408(d)(3) of such Code and as having 
                        been transferred to the eligible 
                        retirement plan in a direct trustee to 
                        trustee transfer within 60 days of the 
                        distribution.
                    (D) Definitions.--For purposes of this 
                paragraph--
                            (i) Qualified 2016 disaster 
                        distribution.--Except as provided in 
                        subparagraph (B), the term ``qualified 
                        2016 disaster distribution'' means any 
                        distribution from an eligible 
                        retirement plan made on or after 
                        January 1, 2016, and before January 1, 
                        2018, to an individual whose principal 
                        place of abode at any time during 
                        calendar year 2016 was located in a 
                        disaster area described in subsection 
                        (a) and who has sustained an economic 
                        loss by reason of the events giving 
                        rise to the Presidential declaration 
                        described in subsection (a) which was 
                        applicable to such area.
                            (ii) Eligible retirement plan.--The 
                        term ``eligible retirement plan'' shall 
                        have the meaning given such term by 
                        section 402(c)(8)(B) of the Internal 
                        Revenue Code of 1986.
                    (E) Income inclusion spread over 3-year 
                period.--
                            (i) In general.--In the case of any 
                        qualified 2016 disaster distribution, 
                        unless the taxpayer elects not to have 
                        this subparagraph apply for any taxable 
                        year, any amount required to be 
                        included in gross income for such 
                        taxable year shall be so included 
                        ratably over the 3-taxable-year period 
                        beginning with such taxable year.
                            (ii) Special rule.--For purposes of 
                        clause (i), rules similar to the rules 
                        of subparagraph (E) of section 
                        408A(d)(3) of the Internal Revenue Code 
                        of 1986 shall apply.
                    (F) Special rules.--
                            (i) Exemption of distributions from 
                        trustee to trustee transfer and 
                        withholding rules.--For purposes of 
                        sections 401(a)(31), 402(f), and 3405 
                        of the Internal Revenue Code of 1986, 
                        qualified 2016 disaster distribution 
                        shall not be treated as eligible 
                        rollover distributions.
                            (ii) Qualified 2016 disaster 
                        distributions treated as meeting plan 
                        distribution requirements.--For 
                        purposes of the Internal Revenue Code 
                        of 1986, a qualified 2016 disaster 
                        distribution shall be treated as 
                        meeting the requirements of sections 
                        401(k)(2)(B)(i), 403(b)(7)(A)(ii), 
                        403(b)(11), and 457(d)(1)(A) of the 
                        Internal Revenue Code of 1986.
            (2) Provisions relating to plan amendments.--
                    (A) In general.--If this paragraph applies 
                to any amendment to any plan or annuity 
                contract, such plan or contract shall be 
                treated as being operated in accordance with 
                the terms of the plan during the period 
                described in subparagraph (B)(ii)(I).
                    (B) Amendments to which subsection 
                applies.--
                            (i) In general.--This paragraph 
                        shall apply to any amendment to any 
                        plan or annuity contract which is 
                        made--
                                    (I) pursuant to any 
                                provision of this section, or 
                                pursuant to any regulation 
                                under any provision of this 
                                section, and
                                    (II) on or before the last 
                                day of the first plan year 
                                beginning on or after January 
                                1, 2018, or such later date as 
                                the Secretary prescribes.
                        In the case of a governmental plan (as 
                        defined in section 414(d) of the 
                        Internal Revenue Code of 1986), 
                        subclause (II) shall be applied by 
                        substituting the date which is 2 years 
                        after the date otherwise applied under 
                        subclause (II).
                            (ii) Conditions.--This paragraph 
                        shall not apply to any amendment to a 
                        plan or contract unless such amendment 
                        applies retroactively for such period, 
                        and shall not apply to any such 
                        amendment unless the plan or contract 
                        is operated as if such amendment were 
                        in effect during the period--
                                    (I) beginning on the date 
                                that this section or the 
                                regulation described in clause 
                                (i)(I) takes effect (or in the 
                                case of a plan or contract 
                                amendment not required by this 
                                section or such regulation, the 
                                effective date specified by the 
                                plan), and
                                    (II) ending on the date 
                                described in clause (i)(II) 
                                (or, if earlier, the date the 
                                plan or contract amendment is 
                                adopted).
    (c) Special Rules for Personal Casualty Losses Related to 
2016 Major Disaster.--
            (1) In general.--If an individual has a net 
        disaster loss for any taxable year beginning after 
        December 31, 2015, and before January 1, 2018--
                    (A) the amount determined under section 
                165(h)(2)(A)(ii) of the Internal Revenue Code 
                of 1986 shall be equal to the sum of--
                            (i) such net disaster loss, and
                            (ii) so much of the excess referred 
                        to in the matter preceding clause (i) 
                        of section 165(h)(2)(A) of such Code 
                        (reduced by the amount in clause (i) of 
                        this subparagraph) as exceeds 10 
                        percent of the adjusted gross income of 
                        the individual,
                    (B) section 165(h)(1) of such Code shall be 
                applied by substituting ``$500'' for ``$500 
                ($100 for taxable years beginning after 
                December 31, 2009)'',
                    (C) the standard deduction determined under 
                section 63(c) of such Code shall be increased 
                by the net disaster loss, and
                    (D) section 56(b)(1)(E) of such Code shall 
                not apply to so much of the standard deduction 
                as is attributable to the increase under 
                subparagraph (C) of this paragraph.
            (2) Net disaster loss.--For purposes of this 
        subsection, the term ``net disaster loss'' means the 
        excess of qualified disaster-related personal casualty 
        losses over personal casualty gains (as defined in 
        section 165(h)(3)(A) of the Internal Revenue Code of 
        1986).
            (3) Qualified disaster-related personal casualty 
        losses.--For purposes of this paragraph, the term 
        ``qualified disaster-related personal casualty losses'' 
        means losses described in section 165(c)(3) of the 
        Internal Revenue Code of 1986 which arise in a disaster 
        area described in subsection (a) on or after January 1, 
        2016, and which are attributable to the events giving 
        rise to the Presidential declaration described in 
        subsection (a) which was applicable to such area.

                           PART IV--EDUCATION

SEC. 11031. TREATMENT OF STUDENT LOANS DISCHARGED ON ACCOUNT OF DEATH 
                    OR DISABILITY.

    (a) In General.--Section 108(f) is amended by adding at the 
end the following new paragraph:
            ``(5) Discharges on account of death or 
        disability.--
                    ``(A) In general.--In the case of an 
                individual, gross income does not include any 
                amount which (but for this subsection) would be 
                includible in gross income for such taxable 
                year by reasons of the discharge (in whole or 
                in part) of any loan described in subparagraph 
                (B) after December 31, 2017, and before January 
                1, 2026, if such discharge was--
                            ``(i) pursuant to subsection (a) or 
                        (d) of section 437 of the Higher 
                        Education Act of 1965 or the parallel 
                        benefit under part D of title IV of 
                        such Act (relating to the repayment of 
                        loan liability),
                            ``(ii) pursuant to section 
                        464(c)(1)(F) of such Act, or
                            ``(iii) otherwise discharged on 
                        account of the death or total and 
                        permanent disability of the student.
                    ``(B) Loans described.--A loan is described 
                in this subparagraph if such loan is--
                            ``(i) a student loan (as defined in 
                        paragraph (2)), or
                            ``(ii) a private education loan (as 
                        defined in section 140(7) of the 
                        Consumer Credit Protection Act (15 
                        U.S.C. 1650(7))).''.
    (b) Effective Date.--The amendment made by this section 
shall apply to discharges of indebtedness after December 31, 
2017.

SEC. 11032. 529 ACCOUNT FUNDING FOR ELEMENTARY AND SECONDARY EDUCATION.

    (a) In General.--
            (1) In general.--Section 529(c) is amended by 
        adding at the end the following new paragraph:
            ``(7) Treatment of elementary and secondary 
        tuition.--Any reference in this subsection to the term 
        `qualified higher education expense' shall include a 
        reference to--
                    ``(A) expenses for tuition in connection 
                with enrollment or attendance at an elementary 
                or secondary public, private, or religious 
                school, and
                    ``(B) expenses for--
                            ``(i) curriculum and curricular 
                        materials,
                            ``(ii) books or other instructional 
                        materials,
                            ``(iii) online educational 
                        materials,
                            ``(iv) tuition for tutoring or 
                        educational classes outside of the home 
                        (but only if the tutor or instructor is 
                        not related (within the meaning of 
                        section 152(d)(2)) to the student),
                            ``(v) dual enrollment in an 
                        institution of higher education, and
                            ``(vi) educational therapies for 
                        students with disabilities,
                in connection with a homeschool (whether 
                treated as a homeschool or a private school for 
                purposes of applicable State law).''.
            (2) Limitation.--Section 529(e)(3)(A) is amended by 
        adding at the end the following: ``The amount of cash 
        distributions from all qualified tuition programs 
        described in subsection (b)(1)(A)(ii) with respect to a 
        beneficiary during any taxable year shall, in the 
        aggregate, include not more than $10,000 in expenses 
        described in subsection (c)(7) incurred during the 
        taxable year.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to distributions made after December 31, 2017.

                   PART V--DEDUCTIONS AND EXCLUSIONS

SEC. 11041. SUSPENSION OF DEDUCTION FOR PERSONAL EXEMPTIONS.

    (a) In General.--Subsection (d) of section 151 is amended--
            (1) by striking ``In the case of'' in paragraph (4) 
        and inserting ``Except as provided in paragraph (5), in 
        the case of'', and
            (2) by adding at the end the following new 
        paragraph:
            ``(5) Special rules for taxable years 2018 through 
        2025.--In the case of a taxable year beginning after 
        December 31, 2017, and before January 1, 2026--
                    ``(A) Exemption amount.--The term 
                `exemption amount' means zero.
                    ``(B) References.--For purposes of any 
                other provision of this title, the reduction of 
                the exemption amount to zero under subparagraph 
                (A) shall not be taken into account in 
                determining whether a deduction is allowed or 
                allowable, or whether a taxpayer is entitled to 
                a deduction, under this section.''.
    (b) Application to Estates and Trusts.--Section 
642(b)(2)(C) is amended by adding at the end the following new 
clause:
                            ``(iii) Years when personal 
                        exemption amount is zero.--
                                    ``(I) In general.--In the 
                                case of any taxable year in 
                                which the exemption amount 
                                under section 151(d) is zero, 
                                clause (i) shall be applied by 
                                substituting `$4,150' for `the 
                                exemption amount under section 
                                151(d)'.
                                    ``(II) Inflation 
                                adjustment.--In the case of any 
                                taxable year beginning in a 
                                calendar year after 2018, the 
                                $4,150 amount in subparagraph 
                                (A) shall be increased in the 
                                same manner as provided in 
                                section 6334(d)(4)(C).''.
    (c) Modification of Wage Withholding Rules.--
            (1) In general.--Section 3402(a)(2) is amended by 
        striking ``means the amount'' and all that follows and 
        inserting ``means the amount by which the wages exceed 
        the taxpayer's withholding allowance, prorated to the 
        payroll period.''.
            (2) Conforming amendments.--
                    (A) Section 3401 is amended by striking 
                subsection (e).
                    (B) Paragraphs (1) and (2) of section 
                3402(f) are amended to read as follows:
            ``(1) In general.--Under rules determined by the 
        Secretary, an employee receiving wages shall on any day 
        be entitled to a withholding allowance determined based 
        on--
                    ``(A) whether the employee is an individual 
                for whom a deduction is allowable with respect 
                to another taxpayer under section 151;
                    ``(B) if the employee is married, whether 
                the employee's spouse is entitled to an 
                allowance, or would be so entitled if such 
                spouse were an employee receiving wages, under 
                subparagraph (A) or (D), but only if such 
                spouse does not have in effect a withholding 
                allowance certificate claiming such allowance;
                    ``(C) the number of individuals with 
                respect to whom, on the basis of facts existing 
                at the beginning of such day, there may 
                reasonably be expected to be allowable a credit 
                under section 24(a) for the taxable year under 
                subtitle A in respect of which amounts deducted 
                and withheld under this chapter in the calendar 
                year in which such day falls are allowed as a 
                credit;
                    ``(D) any additional amounts to which the 
                employee elects to take into account under 
                subsection (m), but only if the employee's 
                spouse does not have in effect a withholding 
                allowance certificate making such an election;
                    ``(E) the standard deduction allowable to 
                such employee (one-half of such standard 
                deduction in the case of an employee who is 
                married (as determined under section 7703) and 
                whose spouse is an employee receiving wages 
                subject to withholding); and
                    ``(F) whether the employee has withholding 
                allowance certificates in effect with respect 
                to more than 1 employer.
            ``(2) Allowance certificates.--
                    ``(A) On commencement of employment.--On or 
                before the date of the commencement of 
                employment with an employer, the employee shall 
                furnish the employer with a signed withholding 
                allowance certificate relating to the 
                withholding allowance claimed by the employee, 
                which shall in no event exceed the amount to 
                which the employee is entitled.
                    ``(B) Change of status.--If, on any day 
                during the calendar year, an employee's 
                withholding allowance is in excess of the 
                withholding allowance to which the employee 
                would be entitled had the employee submitted a 
                true and accurate withholding allowance 
                certificate to the employer on that day, the 
                employee shall within 10 days thereafter 
                furnish the employer with a new withholding 
                allowance certificate. If, on any day during 
                the calendar year, an employee's withholding 
                allowance is greater than the withholding 
                allowance claimed, the employee may furnish the 
                employer with a new withholding allowance 
                certificate relating to the withholding 
                allowance to which the employee is so entitled, 
                which shall in no event exceed the amount to 
                which the employee is entitled on such day.
                    ``(C) Change of status which affects next 
                calendar year.--If on any day during the 
                calendar year the withholding allowance to 
                which the employee will be, or may reasonably 
                be expected to be, entitled at the beginning of 
                the employee's next taxable year under subtitle 
                A is different from the allowance to which the 
                employee is entitled on such day, the employee 
                shall, in such cases and at such times as the 
                Secretary shall by regulations prescribe, 
                furnish the employer with a withholding 
                allowance certificate relating to the 
                withholding allowance which the employee claims 
                with respect to such next taxable year, which 
                shall in no event exceed the withholding 
                allowance to which the employee will be, or may 
                reasonably be expected to be, so entitled.''.
                    (C) Subsections (b)(1), (b)(2), (f)(3), 
                (f)(4), (f)(5), (f)(7) (including the heading 
                thereof), (g)(4), (l)(1), (l)(2), and (n) of 
                section 3402 are each amended by striking 
                ``exemption'' each place it appears and 
                inserting ``allowance''.
                    (D) The heading of section 3402(f) is 
                amended by striking ``Exemptions'' and 
                inserting ``Allowance''.
                    (E) Section 3402(m) is amended by striking 
                ``additional withholding allowances or 
                additional reductions in withholding under this 
                subsection. In determining the number of 
                additional withholding allowances'' and 
                inserting ``an additional withholding allowance 
                or additional reductions in withholding under 
                this subsection. In determining the additional 
                withholding allowance''.
                    (F) Paragraphs (3) and (4) of section 
                3405(a) (and the heading for such paragraph 
                (4)) are each amended by striking ``exemption'' 
                each place it appears and inserting 
                ``allowance''.
                    (G) Section 3405(a)(4) is amended by 
                striking ``shall be determined'' and all that 
                follows through ``3 withholding exemptions'' 
                and inserting ``shall be determined under rules 
                prescribed by the Secretary''.
    (d) Exception for Determining Property Exempt From Levy.--
Section 6334(d) is amended by adding at the end the following 
new paragraph:
            ``(4) Years when personal exemption amount is 
        zero.--
                    ``(A) In general.--In the case of any 
                taxable year in which the exemption amount 
                under section 151(d) is zero, paragraph (2) 
                shall not apply and for purposes of paragraph 
                (1) the term `exempt amount' means an amount 
                equal to--
                            ``(i) the sum of the amount 
                        determined under subparagraph (B) and 
                        the standard deduction, divided by
                            ``(ii) 52.
                    ``(B) Amount determined.--For purposes of 
                subparagraph (A), the amount determined under 
                this subparagraph is $4,150 multiplied by the 
                number of the taxpayer's dependents for the 
                taxable year in which the levy occurs.
                    ``(C) Inflation adjustment.--In the case of 
                any taxable year beginning in a calendar year 
                after 2018, the $4,150 amount in subparagraph 
                (B) shall be increased by an amount equal to--
                            ``(i) such dollar amount, 
                        multiplied by
                            ``(ii) the cost-of-living 
                        adjustment determined under section 
                        1(f)(3) for the calendar year in which 
                        the taxable year begins, determined by 
                        substituting `2017' for `2016' in 
                        subparagraph (A)(ii) thereof.
                If any increase determined under the preceding 
                sentence is not a multiple of $100, such 
                increase shall be rounded to the next lowest 
                multiple of $100.
                    ``(D) Verified statement.--Unless the 
                taxpayer submits to the Secretary a written and 
                properly verified statement specifying the 
                facts necessary to determine the proper amount 
                under subparagraph (A), subparagraph (A) shall 
                be applied as if the taxpayer were a married 
                individual filing a separate return with no 
                dependents.''.
    (e) Persons Required to Make Returns of Income.--Section 
6012 is amended by adding at the end the following new 
subsection:
    ``(f) Special Rule for Taxable Years 2018 Through 2025.--In 
the case of a taxable year beginning after December 31, 2017, 
and before January 1, 2026, subsection (a)(1) shall not apply, 
and every individual who has gross income for the taxable year 
shall be required to make returns with respect to income taxes 
under subtitle A, except that a return shall not be required 
of--
            ``(1) an individual who is not married (determined 
        by applying section 7703) and who has gross income for 
        the taxable year which does not exceed the standard 
        deduction applicable to such individual for such 
        taxable year under section 63, or
            ``(2) an individual entitled to make a joint return 
        if--
                    ``(A) the gross income of such individual, 
                when combined with the gross income of such 
                individual's spouse, for the taxable year does 
                not exceed the standard deduction which would 
                be applicable to the taxpayer for such taxable 
                year under section 63 if such individual and 
                such individual's spouse made a joint return,
                    ``(B) such individual and such individual's 
                spouse have the same household as their home at 
                the close of the taxable year,
                    ``(C) such individual's spouse does not 
                make a separate return, and
                    ``(D) neither such individual nor such 
                individual's spouse is an individual described 
                in section 63(c)(5) who has income (other than 
                earned income) in excess of the amount in 
                effect under section 63(c)(5)(A).''.
    (f) Effective Date.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2017.
            (2) Wage withholding.--The Secretary of the 
        Treasury may administer section 3402 for taxable years 
        beginning before January 1, 2019, without regard to the 
        amendments made by subsections (a) and (c).

SEC. 11042. LIMITATION ON DEDUCTION FOR STATE AND LOCAL, ETC. TAXES.

    (a) In General.--Subsection (b) of section 164 is amended 
by adding at the end the following new paragraph:
            ``(6) Limitation on individual deductions for 
        taxable years 2018 through 2025.--In the case of an 
        individual and a taxable year beginning after December 
        31, 2017, and before January 1, 2026--
                    ``(A) foreign real property taxes shall not 
                be taken into account under subsection (a)(1), 
                and
                    ``(B) the aggregate amount of taxes taken 
                into account under paragraphs (1), (2), and (3) 
                of subsection (a) and paragraph (5) of this 
                subsection for any taxable year shall not 
                exceed $10,000 ($5,000 in the case of a married 
                individual filing a separate return).
        The preceding sentence shall not apply to any foreign 
        taxes described in subsection (a)(3) or to any taxes 
        described in paragraph (1) and (2) of subsection (a) 
        which are paid or accrued in carrying on a trade or 
        business or an activity described in section 212. For 
        purposes of subparagraph (B), an amount paid in a 
        taxable year beginning before January 1, 2018, with 
        respect to a State or local income tax imposed for a 
        taxable year beginning after December 31, 2017, shall 
        be treated as paid on the last day of the taxable year 
        for which such tax is so imposed.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2016.

SEC. 11043. LIMITATION ON DEDUCTION FOR QUALIFIED RESIDENCE INTEREST.

    (a) In General.--Section 163(h)(3) is amended by adding at 
the end the following new subparagraph:
                    ``(F) Special rules for taxable years 2018 
                through 2025.--
                            ``(i) In general.--In the case of 
                        taxable years beginning after December 
                        31, 2017, and before January 1, 2026--
                                    ``(I) Disallowance of home 
                                equity indebtedness interest.--
                                Subparagraph (A)(ii) shall not 
                                apply.
                                    ``(II) Limitation on 
                                acquisition indebtedness.--
                                Subparagraph (B)(ii) shall be 
                                applied by substituting 
                                `$750,000 ($375,000' for 
                                `$1,000,000 ($500,000'.
                                    ``(III) Treatment of 
                                indebtedness incurred on or 
                                before december 15, 2017.--
                                Subclause (II) shall not apply 
                                to any indebtedness incurred on 
                                or before December 15, 2017, 
                                and, in applying such subclause 
                                to any indebtedness incurred 
                                after such date, the limitation 
                                under such subclause shall be 
                                reduced (but not below zero) by 
                                the amount of any indebtedness 
                                incurred on or before December 
                                15, 2017, which is treated as 
                                acquisition indebtedness for 
                                purposes of this subsection for 
                                the taxable year.
                                    ``(IV) Binding contract 
                                exception.--In the case of a 
                                taxpayer who enters into a 
                                written binding contract before 
                                December 15, 2017, to close on 
                                the purchase of a principal 
                                residence before January 1, 
                                2018, and who purchases such 
                                residence before April 1, 2018, 
                                subclause (III) shall be 
                                applied by substituting `April 
                                1, 2018' for `December 15, 
                                2017'.
                            ``(ii) Treatment of limitation in 
                        taxable years after december 31, 
                        2025.--In the case of taxable years 
                        beginning after December 31, 2025, the 
                        limitation under subparagraph (B)(ii) 
                        shall be applied to the aggregate 
                        amount of indebtedness of the taxpayer 
                        described in subparagraph (B)(i) 
                        without regard to the taxable year in 
                        which the indebtedness was incurred.
                            ``(iii) Treatment of refinancings 
                        of indebtedness.--
                                    ``(I) In general.--In the 
                                case of any indebtedness which 
                                is incurred to refinance 
                                indebtedness, such refinanced 
                                indebtedness shall be treated 
                                for purposes of clause (i)(III) 
                                as incurred on the date that 
                                the original indebtedness was 
                                incurred to the extent the 
                                amount of the indebtedness 
                                resulting from such refinancing 
                                does not exceed the amount of 
                                the refinanced indebtedness.
                                    ``(II) Limitation on period 
                                of refinancing.--Subclause (I) 
                                shall not apply to any 
                                indebtedness after the 
                                expiration of the term of the 
                                original indebtedness or, if 
                                the principal of such original 
                                indebtedness is not amortized 
                                over its term, the expiration 
                                of the term of the 1st 
                                refinancing of such 
                                indebtedness (or if earlier, 
                                the date which is 30 years 
                                after the date of such 1st 
                                refinancing).
                            ``(iv) Coordination with exclusion 
                        of income from discharge of 
                        indebtedness.--Section 108(h)(2) shall 
                        be applied without regard to this 
                        subparagraph.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 11044. MODIFICATION OF DEDUCTION FOR PERSONAL CASUALTY LOSSES.

    (a) In General.--Subsection (h) of section 165 is amended 
by adding at the end the following new paragraph:
            ``(5) Limitation for taxable years 2018 through 
        2025.--
                    ``(A) In general.--In the case of an 
                individual, except as provided in subparagraph 
                (B), any personal casualty loss which (but for 
                this paragraph) would be deductible in a 
                taxable year beginning after December 31, 2017, 
                and before January 1, 2026, shall be allowed as 
                a deduction under subsection (a) only to the 
                extent it is attributable to a Federally 
                declared disaster (as defined in subsection 
                (i)(5)).
                    ``(B) Exception related to personal 
                casualty gains.--If a taxpayer has personal 
                casualty gains for any taxable year to which 
                subparagraph (A) applies--
                            ``(i) subparagraph (A) shall not 
                        apply to the portion of the personal 
                        casualty loss not attributable to a 
                        Federally declared disaster (as so 
                        defined) to the extent such loss does 
                        not exceed such gains, and
                            ``(ii) in applying paragraph (2) 
                        for purposes of subparagraph (A) to the 
                        portion of personal casualty loss which 
                        is so attributable to such a disaster, 
                        the amount of personal casualty gains 
                        taken into account under paragraph 
                        (2)(A) shall be reduced by the portion 
                        of such gains taken into account under 
                        clause (i).''.
    (b) Effective Date.--The amendment made by this section 
shall apply to losses incurred in taxable years beginning after 
December 31, 2017.

SEC. 11045. SUSPENSION OF MISCELLANEOUS ITEMIZED DEDUCTIONS.

    (a) In General.--Section 67 is amended by adding at the end 
the following new subsection:
    ``(g) Suspension for Taxable Years 2018 Through 2025.--
Notwithstanding subsection (a), no miscellaneous itemized 
deduction shall be allowed for any taxable year beginning after 
December 31, 2017, and before January 1, 2026.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 11046. SUSPENSION OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

    (a) In General.--Section 68 is amended by adding at the end 
the following new subsection:
    ``(f) Section Not to Apply.--This section shall not apply 
to any taxable year beginning after December 31, 2017, and 
before January 1, 2026.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 11047. SUSPENSION OF EXCLUSION FOR QUALIFIED BICYCLE COMMUTING 
                    REIMBURSEMENT.

    (a) In General.--Section 132(f) is amended by adding at the 
end the following new paragraph:
            ``(8) Suspension of qualified bicycle commuting 
        reimbursement exclusion.--Paragraph (1)(D) shall not 
        apply to any taxable year beginning after December 31, 
        2017, and before January 1, 2026.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 11048. SUSPENSION OF EXCLUSION FOR QUALIFIED MOVING EXPENSE 
                    REIMBURSEMENT.

    (a) In General.--Section 132(g) is amended--
            (1) by striking ``For purposes of this section, the 
        term'' and inserting ``For purposes of this section--
            ``(1) In general.--The term'', and
            (2) by adding at the end the following new 
        paragraph:
            ``(2) Suspension for taxable years 2018 through 
        2025.--Except in the case of a member of the Armed 
        Forces of the United States on active duty who moves 
        pursuant to a military order and incident to a 
        permanent change of station, subsection (a)(6) shall 
        not apply to any taxable year beginning after December 
        31, 2017, and before January 1, 2026.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 11049. SUSPENSION OF DEDUCTION FOR MOVING EXPENSES.

    (a) In General.--Section 217 is amended by adding at the 
end the following new subsection:
    ``(k) Suspension of Deduction for Taxable Years 2018 
Through 2025.--Except in the case of an individual to whom 
subsection (g) applies, this section shall not apply to any 
taxable year beginning after December 31, 2017, and before 
January 1, 2026.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 11050. LIMITATION ON WAGERING LOSSES.

    (a) In General.--Section 165(d) is amended by adding at the 
end the following: ``For purposes of the preceding sentence, in 
the case of taxable years beginning after December 31, 2017, 
and before January 1, 2026, the term `losses from wagering 
transactions' includes any deduction otherwise allowable under 
this chapter incurred in carrying on any wagering 
transaction.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 11051. REPEAL OF DEDUCTION FOR ALIMONY PAYMENTS.

    (a) In General.--Part VII of subchapter B is amended by 
striking by striking section 215 (and by striking the item 
relating to such section in the table of sections for such 
subpart).
    (b) Conforming Amendments.--
            (1) Corresponding repeal of provisions providing 
        for inclusion of alimony in gross income.--
                    (A) Subsection (a) of section 61 is amended 
                by striking paragraph (8) and by redesignating 
                paragraphs (9) through (15) as paragraphs (8) 
                through (14), respectively.
                    (B) Part II of subchapter B of chapter 1 is 
                amended by striking section 71 (and by striking 
                the item relating to such section in the table 
                of sections for such part).
                    (C) Subpart F of part I of subchapter J of 
                chapter 1 is amended by striking section 682 
                (and by striking the item relating to such 
                section in the table of sections for such 
                subpart).
            (2) Related to repeal of section 215.--
                    (A) Section 62(a) is amended by striking 
                paragraph (10).
                    (B) Section 3402(m)(1) is amended by 
                striking ``(other than paragraph (10) 
                thereof)''.
                    (C) Section 6724(d)(3) is amended by 
                striking subparagraph (C) and by redesignating 
                subparagraph (D) as subparagraph (C).
            (3) Related to repeal of section 71.--
                    (A) Section 121(d)(3) is amended--
                            (i) by striking ``(as defined in 
                        section 71(b)(2))'' in subparagraph 
                        (B), and
                            (ii) by adding at the end the 
                        following new subparagraph:
                    ``(C) Divorce or separation instrument.--
                For purposes of this paragraph, the term 
                `divorce or separation instrument' means--
                            ``(i) a decree of divorce or 
                        separate maintenance or a written 
                        instrument incident to such a decree,
                            ``(ii) a written separation 
                        agreement, or
                            ``(iii) a decree (not described in 
                        clause (i)) requiring a spouse to make 
                        payments for the support or maintenance 
                        of the other spouse.''.
                    (B) Section 152(d)(5) is amended to read as 
                follows:
            ``(5) Special rules for support.--
                    ``(A) In general.--For purposes of this 
                subsection--
                            ``(i) payments to a spouse of 
                        alimony or separate maintenance 
                        payments shall not be treated as a 
                        payment by the payor spouse for the 
                        support of any dependent, and
                            ``(ii) in the case of the 
                        remarriage of a parent, support of a 
                        child received from the parent's spouse 
                        shall be treated as received from the 
                        parent.
                    ``(B) Alimony or separate maintenance 
                payment.--For purposes of subparagraph (A), the 
                term `alimony or separate maintenance payment' 
                means any payment in cash if--
                            ``(i) such payment is received by 
                        (or on behalf of) a spouse under a 
                        divorce or separation instrument (as 
                        defined in section 121(d)(3)(C)),
                            ``(ii) in the case of an individual 
                        legally separated from the individual's 
                        spouse under a decree of divorce or of 
                        separate maintenance, the payee spouse 
                        and the payor spouse are not members of 
                        the same household at the time such 
                        payment is made, and
                            ``(iii) there is no liability to 
                        make any such payment for any period 
                        after the death of the payee spouse and 
                        there is no liability to make any 
                        payment (in cash or property) as a 
                        substitute for such payments after the 
                        death of the payee spouse.''.
                    (C) Section 219(f)(1) is amended by 
                striking the third sentence.
                    (D) Section 220(f)(7) is amended by 
                striking ``subparagraph (A) of section 
                71(b)(2)'' and inserting ``clause (i) of 
                section 121(d)(3)(C)''.
                    (E) Section 223(f)(7) is amended by 
                striking ``subparagraph (A) of section 
                71(b)(2)'' and inserting ``clause (i) of 
                section 121(d)(3)(C)''.
                    (F) Section 382(l)(3)(B)(iii) is amended by 
                striking ``section 71(b)(2)'' and inserting 
                ``section 121(d)(3)(C)''.
                    (G) Section 408(d)(6) is amended by 
                striking ``subparagraph (A) of section 
                71(b)(2)'' and inserting ``clause (i) of 
                section 121(d)(3)(C)''.
            (4) Additional conforming amendments.--Section 
        7701(a)(17) is amended--
                    (A) by striking ``sections 682 and 2516'' 
                and inserting ``section 2516'', and
                    (B) by striking ``such sections'' each 
                place it appears and inserting ``such 
                section''.
    (c) Effective Date.--The amendments made by this section 
shall apply to--
            (1) any divorce or separation instrument (as 
        defined in section 71(b)(2) of the Internal Revenue 
        Code of 1986 as in effect before the date of the 
        enactment of this Act) executed after December 31, 
        2018, and
            (2) any divorce or separation instrument (as so 
        defined) executed on or before such date and modified 
        after such date if the modification expressly provides 
        that the amendments made by this section apply to such 
        modification.

           PART VI--INCREASE IN ESTATE AND GIFT TAX EXEMPTION

SEC. 11061. INCREASE IN ESTATE AND GIFT TAX EXEMPTION.

    (a) In General.--Section 2010(c)(3) is amended by adding at 
the end the following new subparagraph:
                    ``(C) Increase in basic exclusion amount.--
                In the case of estates of decedents dying or 
                gifts made after December 31, 2017, and before 
                January 1, 2026, subparagraph (A) shall be 
                applied by substituting `$10,000,000' for 
                `$5,000,000'.''.
    (b) Conforming Amendment.--Subsection (g) of section 2001 
is amended to read as follows:
    ``(g) Modifications to Tax Payable.--
            ``(1) Modifications to gift tax payable to reflect 
        different tax rates.--For purposes of applying 
        subsection (b)(2) with respect to 1 or more gifts, the 
        rates of tax under subsection (c) in effect at the 
        decedent's death shall, in lieu of the rates of tax in 
        effect at the time of such gifts, be used both to 
        compute--
                    ``(A) the tax imposed by chapter 12 with 
                respect to such gifts, and
                    ``(B) the credit allowed against such tax 
                under section 2505, including in computing--
                            ``(i) the applicable credit amount 
                        under section 2505(a)(1), and
                            ``(ii) the sum of the amounts 
                        allowed as a credit for all preceding 
                        periods under section 2505(a)(2).
            ``(2) Modifications to estate tax payable to 
        reflect different basic exclusion amounts.--The 
        Secretary shall prescribe such regulations as may be 
        necessary or appropriate to carry out this section with 
        respect to any difference between--
                    ``(A) the basic exclusion amount under 
                section 2010(c)(3) applicable at the time of 
                the decedent's death, and
                    ``(B) the basic exclusion amount under such 
                section applicable with respect to any gifts 
                made by the decedent.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to estates of decedents dying and gifts made after 
December 31, 2017.

       PART VII--EXTENSION OF TIME LIMIT FOR CONTESTING IRS LEVY

SEC. 11071. EXTENSION OF TIME LIMIT FOR CONTESTING IRS LEVY.

    (a) Extension of Time for Return of Property Subject to 
Levy.--Subsection (b) of section 6343 is amended by striking 
``9 months'' and inserting ``2 years''.
    (b) Period of Limitation on Suits.--Subsection (c) of 
section 6532 is amended--
            (1) by striking ``9 months'' in paragraph (1) and 
        inserting ``2 years'', and
            (2) by striking ``9-month'' in paragraph (2) and 
        inserting ``2-year''.
    (c) Effective Date.--The amendments made by this section 
shall apply to--
            (1) levies made after the date of the enactment of 
        this Act, and
            (2) levies made on or before such date if the 9-
        month period has not expired under section 6343(b) of 
        the Internal Revenue Code of 1986 (without regard to 
        this section) as of such date.

                     PART VIII--INDIVIDUAL MANDATE

SEC. 11081. ELIMINATION OF SHARED RESPONSIBILITY PAYMENT FOR 
                    INDIVIDUALS FAILING TO MAINTAIN MINIMUM ESSENTIAL 
                    COVERAGE.

    (a) In General.--Section 5000A(c) is amended--
            (1) in paragraph (2)(B)(iii), by striking ``2.5 
        percent'' and inserting ``Zero percent'', and
            (2) in paragraph (3)--
                    (A) by striking ``$695'' in subparagraph 
                (A) and inserting ``$0'', and
                    (B) by striking subparagraph (D).
    (b) Effective Date.--The amendments made by this section 
shall apply to months beginning after December 31, 2018.

                  Subtitle B--Alternative Minimum Tax

SEC. 12001. REPEAL OF TAX FOR CORPORATIONS.

    (a) In General.--Section 55(a) is amended by striking 
``There'' and inserting ``In the case of a taxpayer other than 
a corporation, there''.
    (b) Conforming Amendments.--
            (1) Section 38(c)(6) is amended by adding at the 
        end the following new subparagraph:
                    ``(E) Corporations.--In the case of a 
                corporation, this subsection shall be applied 
                by treating the corporation as having a 
                tentative minimum tax of zero.''.
            (2) Section 53(d)(2) is amended by inserting ``, 
        except that in the case of a corporation, the tentative 
        minimum tax shall be treated as zero'' before the 
        period at the end.
            (3)(A) Section 55(b)(1) is amended to read as 
        follows:
            ``(1) Amount of tentative tax.--
                    ``(A) In general.--The tentative minimum 
                tax for the taxable year is the sum of--
                            ``(i) 26 percent of so much of the 
                        taxable excess as does not exceed 
                        $175,000, plus
                            ``(ii) 28 percent of so much of the 
                        taxable excess as exceeds $175,000.
                The amount determined under the preceding 
                sentence shall be reduced by the alternative 
                minimum tax foreign tax credit for the taxable 
                year.
                    ``(B) Taxable excess.--For purposes of this 
                subsection, the term `taxable excess' means so 
                much of the alternative minimum taxable income 
                for the taxable year as exceeds the exemption 
                amount.
                    ``(C) Married individual filing separate 
                return.--In the case of a married individual 
                filing a separate return, subparagraph (A) 
                shall be applied by substituting 50 percent of 
                the dollar amount otherwise applicable under 
                clause (i) and clause (ii) thereof. For 
                purposes of the preceding sentence, marital 
                status shall be determined under section 
                7703.''.
            (B) Section 55(b)(3) is amended by striking 
        ``paragraph (1)(A)(i)'' and inserting ``paragraph 
        (1)(A)''.
            (C) Section 59(a) is amended--
                    (i) by striking ``subparagraph (A)(i) or 
                (B)(i) of section 55(b)(1) (whichever applies) 
                in lieu of the highest rate of tax specified in 
                section 1 or 11 (whichever applies)'' in 
                paragraph (1)(C) and inserting ``section 
                55(b)(1) in lieu of the highest rate of tax 
                specified in section 1'', and
                    (ii) in paragraph (2), by striking 
                ``means'' and all that follows and inserting 
                ``means the amount determined under the first 
                sentence of section 55(b)(1)(A).''.
            (D) Section 897(a)(2)(A) is amended by striking 
        ``section 55(b)(1)(A)'' and inserting ``section 
        55(b)(1)''.
            (E) Section 911(f) is amended--
                    (i) in paragraph (1)(B)--
                            (I) by striking ``section 
                        55(b)(1)(A)(ii)'' and inserting 
                        ``section 55(b)(1)(B)'', and
                            (II) by striking ``section 
                        55(b)(1)(A)(i)'' and inserting 
                        ``section 55(b)(1)(A)'', and
                    (ii) in paragraph (2)(B), by striking 
                ``section 55(b)(1)(A)(ii)'' each place it 
                appears and inserting ``section 55(b)(1)(B)''.
            (4) Section 55(c)(1) is amended by striking ``, the 
        section 936 credit allowable under section 27(b), and 
        the Puerto Rico economic activity credit under section 
        30A''.
            (5) Section 55(d), as amended by section 11002, is 
        amended--
                    (A) by striking paragraph (2) and 
                redesignating paragraphs (3) and (4) as 
                paragraphs (2) and (3), respectively,
                    (B) in paragraph (2) (as so redesignated), 
                by inserting ``and'' at the end of subparagraph 
                (B), by striking ``, and'' at the end of 
                subparagraph (C) and inserting a period, and by 
                striking subparagraph (D), and
                    (C) in paragraph (3) (as so redesignated)--
                            (i) by striking ``(b)(1)(A)(i)'' in 
                        subparagraph (B)(i) and inserting 
                        ``(b)(1)(A)'', and
                            (ii) by striking ``paragraph (3)'' 
                        in subparagraph (B)(iii) and inserting 
                        ``paragraph (2)''.
            (6) Section 55 is amended by striking subsection 
        (e).
            (7) Section 56(b)(2) is amended by striking 
        subparagraph (C) and by redesignating subparagraph (D) 
        as subparagraph (C).
            (8)(A) Section 56 is amended by striking 
        subsections (c) and (g).
            (B) Section 847 is amended by striking the last 
        sentence of paragraph (9).
            (C) Section 848 is amended by striking subsection 
        (i).
            (9) Section 58(a) is amended by striking paragraph 
        (3) and redesignating paragraph (4) as paragraph (3).
            (10) Section 59 is amended by striking subsections 
        (b) and (f).
            (11) Section 11(d) is amended by striking ``the 
        taxes imposed by subsection (a) and section 55'' and 
        inserting ``the tax imposed by subsection (a)''.
            (12) Section 12 is amended by striking paragraph 
        (7).
            (13) Section 168(k) is amended by striking 
        paragraph (4).
            (14) Section 882(a)(1) is amended by striking ``, 
        55,''.
            (15) Section 962(a)(1) is amended by striking 
        ``sections 11 and 55'' and inserting ``section 11''.
            (16) Section 1561(a) is amended--
                    (A) by inserting ``and'' at the end of 
                paragraph (1), by striking ``, and'' at the end 
                of paragraph (2) and inserting a period, and by 
                striking paragraph (3), and
                    (B) by striking the last sentence.
            (17) Section 6425(c)(1)(A) is amended to read as 
        follows:
                    ``(A) the tax imposed by section 11 or 
                1201(a), or subchapter L of chapter 1, 
                whichever is applicable, over''.
            (18) Section 6655(e)(2) is amended by striking 
        ``and alternative minimum taxable income'' each place 
        it appears in subparagraphs (A) and (B)(i).
            (19) Section 6655(g)(1)(A) is amended by inserting 
        ``plus'' at the end of clause (i), by striking clause 
        (ii), and by redesignating clause (iii) as clause (ii).
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 12002. CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY OF 
                    CORPORATIONS.

    (a) Credits Treated as Refundable.--Section 53 is amended 
by adding at the end the following new subsection:
    ``(e) Portion of Credit Treated as Refundable.--
            ``(1) In general.--In the case of any taxable year 
        of a corporation beginning in 2018, 2019, 2020, or 
        2021, the limitation under subsection (c) shall be 
        increased by the AMT refundable credit amount for such 
        year.
            ``(2) AMT refundable credit amount.--For purposes 
        of paragraph (1), the AMT refundable credit amount is 
        an amount equal to 50 percent (100 percent in the case 
        of a taxable year beginning in 2021) of the excess (if 
        any) of--
                    ``(A) the minimum tax credit determined 
                under subsection (b) for the taxable year, over
                    ``(B) the minimum tax credit allowed under 
                subsection (a) for such year (before the 
                application of this subsection for such year).
            ``(3) Credit refundable.--For purposes of this 
        title (other than this section), the credit allowed by 
        reason of this subsection shall be treated as a credit 
        allowed under subpart C (and not this subpart).
            ``(4) Short taxable years.--In the case of any 
        taxable year of less than 365 days, the AMT refundable 
        credit amount determined under paragraph (2) with 
        respect to such taxable year shall be the amount which 
        bears the same ratio to such amount determined without 
        regard to this paragraph as the number of days in such 
        taxable year bears to 365.''.
    (b) Treatment of References.--Section 53(d) is amended by 
adding at the end the following new paragraph:
            ``(3) AMT term references.--In the case of a 
        corporation, any references in this subsection to 
        section 55, 56, or 57 shall be treated as a reference 
        to such section as in effect before the amendments made 
        by Tax Cuts and Jobs Act.''.
    (c) Conforming Amendment.--Section 1374(b)(3)(B) is amended 
by striking the last sentence thereof.
    (d) Effective Date.--
            (1) In general.--The amendments made by this 
        section shall apply to taxable years beginning after 
        December 31, 2017.
            (2) Conforming amendment.--The amendment made by 
        subsection (c) shall apply to taxable years beginning 
        after December 31, 2021.

SEC. 12003. INCREASED EXEMPTION FOR INDIVIDUALS.

    (a) In General.--Section 55(d), as amended by the preceding 
provisions of this Act, is amended by adding at the end the 
following new paragraph:
            ``(4) Special rule for taxable years beginning 
        after 2017 and before 2026.--
                    ``(A) In general.--In the case of any 
                taxable year beginning after December 31, 2017, 
                and before January 1, 2026--
                            ``(i) paragraph (1) shall be 
                        applied--
                                    ``(I) by substituting 
                                `$109,400' for `$78,750' in 
                                subparagraph (A), and
                                    ``(II) by substituting 
                                `$70,300' for `$50,600' in 
                                subparagraph (B), and
                            ``(ii) paragraph (2) shall be 
                        applied--
                                    ``(I) by substituting 
                                `$1,000,000' for `$150,000' in 
                                subparagraph (A),
                                    ``(II) by substituting `50 
                                percent of the dollar amount 
                                applicable under subparagraph 
                                (A)' for `$112,500' in 
                                subparagraph (B), and
                                    ``(III) in the case of a 
                                taxpayer described in paragraph 
                                (1)(D), without regard to the 
                                substitution under subclause 
                                (I).
                    ``(B) Inflation adjustment.--
                            ``(i) In general.--In the case of 
                        any taxable year beginning in a 
                        calendar year after 2018, the amounts 
                        described in clause (ii) shall each be 
                        increased by an amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting `calendar year 
                                2017' for `calendar year 2016' 
                                in subparagraph (A)(ii) 
                                thereof.
                            ``(ii) Amounts described.--The 
                        amounts described in this clause are 
                        the $109,400 amount in subparagraph 
                        (A)(i)(I), the $70,300 amount in 
                        subparagraph (A)(i)(II), and the 
                        $1,000,000 amount in subparagraph 
                        (A)(ii)(I).
                            ``(iii) Rounding.--Any increased 
                        amount determined under clause (i) 
                        shall be rounded to the nearest 
                        multiple of $100.
                            ``(iv) Coordination with current 
                        adjustments.--In the case of any 
                        taxable year to which subparagraph (A) 
                        applies, no adjustment shall be made 
                        under paragraph (3) to any of the 
                        numbers which are substituted under 
                        subparagraph (A) and adjusted under 
                        this subparagraph.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

                Subtitle C--Business-related Provisions

                      PART I--CORPORATE PROVISIONS

SEC. 13001. 21-PERCENT CORPORATE TAX RATE.

    (a) In General.--Subsection (b) of section 11 is amended to 
read as follows:
    ``(b) Amount of Tax.--The amount of the tax imposed by 
subsection (a) shall be 21 percent of taxable income.''.
    (b) Conforming Amendments.--
            (1) The following sections are each amended by 
        striking ``section 11(b)(1)'' and inserting ``section 
        11(b)'':
                    (A) Section 280C(c)(3)(B)(ii)(II).
                    (B) Paragraphs (2)(B) and (6)(A)(ii) of 
                section 860E(e).
                    (C) Section 7874(e)(1)(B).
            (2)(A) Part I of subchapter P of chapter 1 is 
        amended by striking section 1201 (and by striking the 
        item relating to such section in the table of sections 
        for such part).
            (B) Section 12 is amended by striking paragraphs 
        (4) and (6), and by redesignating paragraph (5) as 
        paragraph (4).
            (C) Section 453A(c)(3) is amended by striking ``or 
        1201 (whichever is appropriate)''.
            (D) Section 527(b) is amended--
                    (i) by striking paragraph (2), and
                    (ii) by striking all that precedes ``is 
                hereby imposed'' and inserting:
    ``(b) Tax Imposed.--A tax''.
            (E) Sections 594(a) is amended by striking ``taxes 
        imposed by section 11 or 1201(a)'' and inserting ``tax 
        imposed by section 11''.
            (F) Section 691(c)(4) is amended by striking 
        ``1201,''.
            (G) Section 801(a) is amended--
                    (i) by striking paragraph (2), and
                    (ii) by striking all that precedes ``is 
                hereby imposed'' and inserting:
    ``(a) Tax Imposed.--A tax''.
            (H) Section 831(e) is amended by striking paragraph 
        (1) and by redesignating paragraphs (2) and (3) as 
        paragraphs (1) and (2), respectively.
            (I) Sections 832(c)(5) and 834(b)(1)(D) are each 
        amended by striking ``sec. 1201 and following,''.
            (J) Section 852(b)(3)(A) is amended by striking 
        ``section 1201(a)'' and inserting ``section 11(b)''.
            (K) Section 857(b)(3) is amended--
                    (i) by striking subparagraph (A) and 
                redesignating subparagraphs (B) through (F) as 
                subparagraphs (A) through (E), respectively,
                    (ii) in subparagraph (C), as so 
                redesignated--
                            (I) by striking ``subparagraph 
                        (A)(ii)'' in clause (i) thereof and 
                        inserting ``paragraph (1)'',
                            (II) by striking ``the tax imposed 
                        by subparagraph (A)(ii)'' in clauses 
                        (ii) and (iv) thereof and inserting 
                        ``the tax imposed by paragraph (1) on 
                        undistributed capital gain'',
                    (iii) in subparagraph (E), as so 
                redesignated, by striking ``subparagraph (B) or 
                (D)'' and inserting ``subparagraph (A) or 
                (C)'', and
                    (iv) by adding at the end the following new 
                subparagraph:
                    ``(F) Undistributed capital gain.--For 
                purposes of this paragraph, the term 
                `undistributed capital gain' means the excess 
                of the net capital gain over the deduction for 
                dividends paid (as defined in section 561) 
                determined with reference to capital gain 
                dividends only.''.
            (L) Section 882(a)(1), as amended by section 12001, 
        is further amended by striking ``or 1201(a)''.
            (M) Section 904(b) is amended--
                    (i) by striking ``or 1201(a)'' in paragraph 
                (2)(C),
                    (ii) by striking paragraph (3)(D) and 
                inserting the following:
                    ``(D) Capital gain rate differential.--
                There is a capital gain rate differential for 
                any year if subsection (h) of section 1 applies 
                to such taxable year.'', and
                    (iii) by striking paragraph (3)(E) and 
                inserting the following:
                    ``(E) Rate differential portion.--The rate 
                differential portion of foreign source net 
                capital gain, net capital gain, or the excess 
                of net capital gain from sources within the 
                United States over net capital gain, as the 
                case may be, is the same proportion of such 
                amount as--
                            ``(i) the excess of--
                                    ``(I) the highest rate of 
                                tax set forth in subsection 
                                (a), (b), (c), (d), or (e) of 
                                section 1 (whichever applies), 
                                over
                                    ``(II) the alternative rate 
                                of tax determined under section 
                                1(h), bears to
                            ``(ii) that rate referred to in 
                        subclause (I).''.
            (N) Section 1374(b) is amended by striking 
        paragraph (4).
            (O) Section 1381(b) is amended by striking ``taxes 
        imposed by section 11 or 1201'' and inserting ``tax 
        imposed by section 11''.
            (P) Sections 6425(c)(1)(A), as amended by section 
        12001, and 6655(g)(1)(A)(i) are each amended by 
        striking ``or 1201(a),''.
            (Q) Section 7518(g)(6)(A) is amended by striking 
        ``or 1201(a)''.
            (3)(A) Section 1445(e)(1) is amended--
                    (i) by striking ``35 percent'' and 
                inserting ``the highest rate of tax in effect 
                for the taxable year under section 11(b)'', and
                    (ii) by striking ``of the gain'' and 
                inserting ``multiplied by the gain''.
            (B) Section 1445(e)(2) is amended by striking ``35 
        percent of the amount'' and inserting ``the highest 
        rate of tax in effect for the taxable year under 
        section 11(b) multiplied by the amount''.
            (C) Section 1445(e)(6) is amended--
                    (i) by striking ``35 percent'' and 
                inserting ``the highest rate of tax in effect 
                for the taxable year under section 11(b)'', and
                    (ii) by striking ``of the amount'' and 
                inserting ``multiplied by the amount''.
            (D) Section 1446(b)(2)(B) is amended by striking 
        ``section 11(b)(1)'' and inserting ``section 11(b)''.
            (4) Section 852(b)(1) is amended by striking the 
        last sentence.
            (5)(A) Part I of subchapter B of chapter 5 is 
        amended by striking section 1551 (and by striking the 
        item relating to such section in the table of sections 
        for such part).
            (B) Section 535(c)(5) is amended to read as 
        follows:
            ``(5) Cross reference.--For limitation on credit 
        provided in paragraph (2) or (3) in the case of certain 
        controlled corporations, see section 1561.''.
            (6)(A) Section 1561, as amended by section 12001, 
        is amended to read as follows:

``SEC. 1561. LIMITATION ON ACCUMULATED EARNINGS CREDIT IN THE CASE OF 
                    CERTAIN CONTROLLED CORPORATIONS.

    ``(a) In General.--The component members of a controlled 
group of corporations on a December 31 shall, for their taxable 
years which include such December 31, be limited for purposes 
of this subtitle to one $250,000 ($150,000 if any component 
member is a corporation described in section 535(c)(2)(B)) 
amount for purposes of computing the accumulated earnings 
credit under section 535(c)(2) and (3). Such amount shall be 
divided equally among the component members of such group on 
such December 31 unless the Secretary prescribes regulations 
permitting an unequal allocation of such amount.
    ``(b) Certain Short Taxable Years.--If a corporation has a 
short taxable year which does not include a December 31 and is 
a component member of a controlled group of corporations with 
respect to such taxable year, then for purposes of this 
subtitle, the amount to be used in computing the accumulated 
earnings credit under section 535(c)(2) and (3) of such 
corporation for such taxable year shall be the amount specified 
in subsection (a) with respect to such group, divided by the 
number of corporations which are component members of such 
group on the last day of such taxable year. For purposes of the 
preceding sentence, section 1563(b) shall be applied as if such 
last day were substituted for December 31.''.
                    (B) The table of sections for part II of 
                subchapter B of chapter 5 is amended by 
                striking the item relating to section 1561 and 
                inserting the following new item:

``Sec. 1561. Limitation on accumulated earnings credit in the case of 
          certain controlled corporations.''.

            (7) Section 7518(g)(6)(A) is amended--
                    (A) by striking ``With respect to the 
                portion'' and inserting ``In the case of a 
                taxpayer other than a corporation, with respect 
                to the portion'', and
                    (B) by striking ``(34 percent in the case 
                of a corporation)''.
    (c) Effective Date.--
            (1) In general.--Except as otherwise provided in 
        this subsection, the amendments made by subsections (a) 
        and (b) shall apply to taxable years beginning after 
        December 31, 2017.
            (2) Withholding.--The amendments made by subsection 
        (b)(3) shall apply to distributions made after December 
        31, 2017.
            (3) Certain transfers.--The amendments made by 
        subsection (b)(6) shall apply to transfers made after 
        December 31, 2017.
    (d) Normalization Requirements.--
            (1) In general.--A normalization method of 
        accounting shall not be treated as being used with 
        respect to any public utility property for purposes of 
        section 167 or 168 of the Internal Revenue Code of 1986 
        if the taxpayer, in computing its cost of service for 
        ratemaking purposes and reflecting operating results in 
        its regulated books of account, reduces the excess tax 
        reserve more rapidly or to a greater extent than such 
        reserve would be reduced under the average rate 
        assumption method.
            (2) Alternative method for certain taxpayers.--If, 
        as of the first day of the taxable year that includes 
        the date of enactment of this Act--
                    (A) the taxpayer was required by a 
                regulatory agency to compute depreciation for 
                public utility property on the basis of an 
                average life or composite rate method, and
                    (B) the taxpayer's books and underlying 
                records did not contain the vintage account 
                data necessary to apply the average rate 
                assumption method,
        the taxpayer will be treated as using a normalization 
        method of accounting if, with respect to such 
        jurisdiction, the taxpayer uses the alternative method 
        for public utility property that is subject to the 
        regulatory authority of that jurisdiction.
            (3) Definitions.--For purposes of this subsection--
                    (A) Excess tax reserve.--The term ``excess 
                tax reserve'' means the excess of--
                            (i) the reserve for deferred taxes 
                        (as described in section 
                        168(i)(9)(A)(ii) of the Internal 
                        Revenue Code of 1986) as of the day 
                        before the corporate rate reductions 
                        provided in the amendments made by this 
                        section take effect, over
                            (ii) the amount which would be the 
                        balance in such reserve if the amount 
                        of such reserve were determined by 
                        assuming that the corporate rate 
                        reductions provided in this Act were in 
                        effect for all prior periods.
                    (B) Average rate assumption method.--The 
                average rate assumption method is the method 
                under which the excess in the reserve for 
                deferred taxes is reduced over the remaining 
                lives of the property as used in its regulated 
                books of account which gave rise to the reserve 
                for deferred taxes. Under such method, during 
                the time period in which the timing differences 
                for the property reverse, the amount of the 
                adjustment to the reserve for the deferred 
                taxes is calculated by multiplying--
                            (i) the ratio of the aggregate 
                        deferred taxes for the property to the 
                        aggregate timing differences for the 
                        property as of the beginning of the 
                        period in question, by
                            (ii) the amount of the timing 
                        differences which reverse during such 
                        period.
                    (C) Alternative method.--The ``alternative 
                method'' is the method in which the taxpayer--
                            (i) computes the excess tax reserve 
                        on all public utility property included 
                        in the plant account on the basis of 
                        the weighted average life or composite 
                        rate used to compute depreciation for 
                        regulatory purposes, and
                            (ii) reduces the excess tax reserve 
                        ratably over the remaining regulatory 
                        life of the property.
            (4) Tax increased for normalization violation.--If, 
        for any taxable year ending after the date of the 
        enactment of this Act, the taxpayer does not use a 
        normalization method of accounting for the corporate 
        rate reductions provided in the amendments made by this 
        section--
                    (A) the taxpayer's tax for the taxable year 
                shall be increased by the amount by which it 
                reduces its excess tax reserve more rapidly 
                than permitted under a normalization method of 
                accounting, and
                    (B) such taxpayer shall not be treated as 
                using a normalization method of accounting for 
                purposes of subsections (f)(2) and (i)(9)(C) of 
                section 168 of the Internal Revenue Code of 
                1986.

SEC. 13002. REDUCTION IN DIVIDEND RECEIVED DEDUCTIONS TO REFLECT LOWER 
                    CORPORATE INCOME TAX RATES.

    (a) Dividends Received by Corporations.--
            (1) In general.--Section 243(a)(1) is amended by 
        striking ``70 percent'' and inserting ``50 percent''.
            (2) Dividends from 20-percent owned corporations.--
        Section 243(c)(1) is amended--
                    (A) by striking ``80 percent'' and 
                inserting ``65 percent'', and
                    (B) by striking ``70 percent'' and 
                inserting ``50 percent''.
            (3) Conforming amendment.--The heading for section 
        243(c) is amended by striking ``Retention of 80-percent 
        Dividend Received Deduction'' and inserting ``Increased 
        Percentage''.
    (b) Dividends Received From FSC.--Section 245(c)(1)(B) is 
amended--
            (1) by striking ``70 percent'' and inserting ``50 
        percent'', and
            (2) by striking ``80 percent'' and inserting ``65 
        percent''.
    (c) Limitation on Aggregate Amount of Deductions.--Section 
246(b)(3) is amended--
            (1) by striking ``80 percent'' in subparagraph (A) 
        and inserting ``65 percent'', and
            (2) by striking ``70 percent'' in subparagraph (B) 
        and inserting ``50 percent''.
    (d) Reduction in Deduction Where Portfolio Stock Is Debt-
financed.--Section 246A(a)(1) is amended--
            (1) by striking ``70 percent'' and inserting ``50 
        percent'', and
            (2) by striking ``80 percent'' and inserting ``65 
        percent''.
    (e) Income From Sources Within the United States.--Section 
861(a)(2) is amended--
            (1) by striking ``100/70th'' and inserting ``100/
        50th'' in subparagraph (B), and
            (2) in the flush sentence at the end--
                    (A) by striking ``100/80th'' and inserting 
                ``100/65th'', and
                    (B) by striking ``100/70th'' and inserting 
                ``100/50th''.
    (f) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

                    PART II--SMALL BUSINESS REFORMS

SEC. 13101. MODIFICATIONS OF RULES FOR EXPENSING DEPRECIABLE BUSINESS 
                    ASSETS.

    (a) Increase in Limitation.--
            (1) Dollar limitation.--Section 179(b)(1) is 
        amended by striking ``$500,000'' and inserting 
        ``$1,000,000''.
            (2) Reduction in limitation.--Section 179(b)(2) is 
        amended by striking ``$2,000,000'' and inserting 
        ``$2,500,000''.
            (3) Inflation adjustments.--
                    (A) In general.--Subparagraph (A) of 
                section 179(b)(6), as amended by section 
                11002(d), is amended--
                            (i) by striking ``2015'' and 
                        inserting ``2018'', and
                            (ii) in clause (ii), by striking 
                        ``calendar year 2014'' and inserting 
                        ``calendar year 2017''.
                    (B) Sport utility vehicles.--Section 
                179(b)(6) is amended--
                            (i) in subparagraph (A), by 
                        striking ``paragraphs (1) and (2)'' and 
                        inserting ``paragraphs (1), (2), and 
                        (5)(A)'', and
                            (ii) in subparagraph (B), by 
                        inserting ``($100 in the case of any 
                        increase in the amount under paragraph 
                        (5)(A))'' after ``$10,000''.
    (b) Section 179 Property To Include Qualified Real 
Property.--
            (1) In general.--Subparagraph (B) of section 
        179(d)(1) is amended to read as follows:
                    ``(B) which is--
                            ``(i) section 1245 property (as 
                        defined in section 1245(a)(3)), or
                            ``(ii) at the election of the 
                        taxpayer, qualified real property (as 
                        defined in subsection (f)), and''.
            (2) Qualified real property defined.--Subsection 
        (f) of section 179 is amended to read as follows:
    ``(f) Qualified Real Property.--For purposes of this 
section, the term `qualified real property' means--
            ``(1) any qualified improvement property described 
        in section 168(e)(6), and
            ``(2) any of the following improvements to 
        nonresidential real property placed in service after 
        the date such property was first placed in service:
                    ``(A) Roofs.
                    ``(B) Heating, ventilation, and air-
                conditioning property.
                    ``(C) Fire protection and alarm systems.
                    ``(D) Security systems.''.
    (c) Repeal of Exclusion for Certain Property.--The last 
sentence of section 179(d)(1) is amended by inserting ``(other 
than paragraph (2) thereof)'' after ``section 50(b)''.
    (d) Effective Date.--The amendments made by this section 
shall apply to property placed in service in taxable years 
beginning after December 31, 2017.

SEC. 13102. SMALL BUSINESS ACCOUNTING METHOD REFORM AND SIMPLIFICATION.

    (a) Modification of Limitation on Cash Method of 
Accounting.--
            (1) Increased limitation.--So much of section 
        448(c) as precedes paragraph (2) is amended to read as 
        follows:
    ``(c) Gross Receipts Test.--For purposes of this section--
            ``(1) In general.--A corporation or partnership 
        meets the gross receipts test of this subsection for 
        any taxable year if the average annual gross receipts 
        of such entity for the 3-taxable-year period ending 
        with the taxable year which precedes such taxable year 
        does not exceed $25,000,000.''.
            (2) Application of exception on annual basis.--
        Section 448(b)(3) is amended to read as follows:
            ``(3) Entities which meet gross receipts test.--
        Paragraphs (1) and (2) of subsection (a) shall not 
        apply to any corporation or partnership for any taxable 
        year if such entity (or any predecessor) meets the 
        gross receipts test of subsection (c) for such taxable 
        year.''.
            (3) Inflation adjustment.--Section 448(c) is 
        amended by adding at the end the following new 
        paragraph:
            ``(4) Adjustment for inflation.--In the case of any 
        taxable year beginning after December 31, 2018, the 
        dollar amount in paragraph (1) shall be increased by an 
        amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment 
                determined under section 1(f)(3) for the 
                calendar year in which the taxable year begins, 
                by substituting `calendar year 2017' for 
                `calendar year 2016' in subparagraph (A)(ii) 
                thereof.
        If any amount as increased under the preceding sentence 
        is not a multiple of $1,000,000, such amount shall be 
        rounded to the nearest multiple of $1,000,000.''.
            (4) Coordination with section 481.--Section 
        448(d)(7) is amended to read as follows:
            ``(7) Coordination with section 481.--Any change in 
        method of accounting made pursuant to this section 
        shall be treated for purposes of section 481 as 
        initiated by the taxpayer and made with the consent of 
        the Secretary.''.
            (5) Application of exception to corporations 
        engaged in farming.--
                    (A) In general.--Section 447(c) is 
                amended--
                            (i) by inserting ``for any taxable 
                        year'' after ``not being a 
                        corporation'' in the matter preceding 
                        paragraph (1), and
                            (ii) by amending paragraph (2) to 
                        read as follows:
            ``(2) a corporation which meets the gross receipts 
        test of section 448(c) for such taxable year.''.
                    (B) Coordination with section 481.--Section 
                447(f) is amended to read as follows:
    ``(f) Coordination With Section 481.--Any change in method 
of accounting made pursuant to this section shall be treated 
for purposes of section 481 as initiated by the taxpayer and 
made with the consent of the Secretary.''.
                    (C) Conforming amendments.--Section 447 is 
                amended--
                            (i) by striking subsections (d), 
                        (e), (h), and (i), and
                            (ii) by redesignating subsections 
                        (f) and (g) (as amended by subparagraph 
                        (B)) as subsections (d) and (e), 
                        respectively.
    (b) Exemption From UNICAP Requirements.--
            (1) In general.--Section 263A is amended by 
        redesignating subsection (i) as subsection (j) and by 
        inserting after subsection (h) the following new 
        subsection:
    ``(i) Exemption for Certain Small Businesses.--
            ``(1) In general.--In the case of any taxpayer 
        (other than a tax shelter prohibited from using the 
        cash receipts and disbursements method of accounting 
        under section 448(a)(3)) which meets the gross receipts 
        test of section 448(c) for any taxable year, this 
        section shall not apply with respect to such taxpayer 
        for such taxable year.
            ``(2) Application of gross receipts test to 
        individuals, etc.-- In the case of any taxpayer which 
        is not a corporation or a partnership, the gross 
        receipts test of section 448(c) shall be applied in the 
        same manner as if each trade or business of such 
        taxpayer were a corporation or partnership.
            ``(3) Coordination with section 481.--Any change in 
        method of accounting made pursuant to this subsection 
        shall be treated for purposes of section 481 as 
        initiated by the taxpayer and made with the consent of 
        the Secretary.''.
            (2) Conforming amendment.--Section 263A(b)(2) is 
        amended to read as follows:
            ``(2) Property acquired for resale.--Real or 
        personal property described in section 1221(a)(1) which 
        is acquired by the taxpayer for resale.''.
    (c) Exemption From Inventories.--Section 471 is amended by 
redesignating subsection (c) as subsection (d) and by inserting 
after subsection (b) the following new subsection:
    ``(c) Exemption for Certain Small Businesses.--
            ``(1) In general.--In the case of any taxpayer 
        (other than a tax shelter prohibited from using the 
        cash receipts and disbursements method of accounting 
        under section 448(a)(3)) which meets the gross receipts 
        test of section 448(c) for any taxable year--
                    ``(A) subsection (a) shall not apply with 
                respect to such taxpayer for such taxable year, 
                and
                    ``(B) the taxpayer's method of accounting 
                for inventory for such taxable year shall not 
                be treated as failing to clearly reflect income 
                if such method either--
                            ``(i) treats inventory as non-
                        incidental materials and supplies, or
                            ``(ii) conforms to such taxpayer's 
                        method of accounting reflected in an 
                        applicable financial statement of the 
                        taxpayer with respect to such taxable 
                        year or, if the taxpayer does not have 
                        any applicable financial statement with 
                        respect to such taxable year, the books 
                        and records of the taxpayer prepared in 
                        accordance with the taxpayer's 
                        accounting procedures.
            ``(2) Applicable financial statement.--For purposes 
        of this subsection, the term `applicable financial 
        statement' has the meaning given the term in section 
        451(b)(3).
            ``(3) Application of gross receipts test to 
        individuals, etc.--In the case of any taxpayer which is 
        not a corporation or a partnership, the gross receipts 
        test of section 448(c) shall be applied in the same 
        manner as if each trade or business of such taxpayer 
        were a corporation or partnership.
            ``(4) Coordination with section 481.--Any change in 
        method of accounting made pursuant to this subsection 
        shall be treated for purposes of section 481 as 
        initiated by the taxpayer and made with the consent of 
        the Secretary.''.
    (d) Exemption From Percentage Completion for Long-term 
Contracts.--
            (1) In general.--Section 460(e)(1)(B) is amended--
                    (A) by inserting ``(other than a tax 
                shelter prohibited from using the cash receipts 
                and disbursements method of accounting under 
                section 448(a)(3))'' after ``taxpayer'' in the 
                matter preceding clause (i), and
                    (B) by amending clause (ii) to read as 
                follows:
                            ``(ii) who meets the gross receipts 
                        test of section 448(c) for the taxable 
                        year in which such contract is entered 
                        into.''.
            (2) Conforming amendments.--Section 460(e) is 
        amended by striking paragraphs (2) and (3), by 
        redesignating paragraphs (4), (5), and (6) as 
        paragraphs (3), (4), and (5), respectively, and by 
        inserting after paragraph (1) the following new 
        paragraph:
            ``(2) Rules related to gross receipts test.--
                    ``(A) Application of gross receipts test to 
                individuals, etc.-- For purposes of paragraph 
                (1)(B)(ii), in the case of any taxpayer which 
                is not a corporation or a partnership, the 
                gross receipts test of section 448(c) shall be 
                applied in the same manner as if each trade or 
                business of such taxpayer were a corporation or 
                partnership.
                    ``(B) Coordination with section 481.--Any 
                change in method of accounting made pursuant to 
                paragraph (1)(B)(ii) shall be treated as 
                initiated by the taxpayer and made with the 
                consent of the Secretary. Such change shall be 
                effected on a cut-off basis for all similarly 
                classified contracts entered into on or after 
                the year of change.''.
    (e) Effective Date.--
            (1) In general.--Except as otherwise provided in 
        this subsection, the amendments made by this section 
        shall apply to taxable years beginning after December 
        31, 2017.
            (2) Preservation of suspense account rules with 
        respect to any existing suspense accounts.--So much of 
        the amendments made by subsection (a)(5)(C) as relate 
        to section 447(i) of the Internal Revenue Code of 1986 
        shall not apply with respect to any suspense account 
        established under such section before the date of the 
        enactment of this Act.
            (3) Exemption from percentage completion for long-
        term contracts.--The amendments made by subsection (d) 
        shall apply to contracts entered into after December 
        31, 2017, in taxable years ending after such date.

             PART III--COST RECOVERY AND ACCOUNTING METHODS

                        Subpart A--Cost Recovery

SEC. 13201. TEMPORARY 100-PERCENT EXPENSING FOR CERTAIN BUSINESS 
                    ASSETS.

    (a) Increased Expensing.--
            (1) In general.--Section 168(k) is amended--
                    (A) in paragraph (1)(A), by striking ``50 
                percent'' and inserting ``the applicable 
                percentage'', and
                    (B) in paragraph (5)(A)(i), by striking 
                ``50 percent'' and inserting ``the applicable 
                percentage''.
            (2) Applicable percentage.--Paragraph (6) of 
        section 168(k) is amended to read as follows:
            ``(6) Applicable percentage.--For purposes of this 
        subsection--
                    ``(A) In general.--Except as otherwise 
                provided in this paragraph, the term 
                `applicable percentage' means--
                            ``(i) in the case of property 
                        placed in service after September 27, 
                        2017, and before January 1, 2023, 100 
                        percent,
                            ``(ii) in the case of property 
                        placed in service after December 31, 
                        2022, and before January 1, 2024, 80 
                        percent,
                            ``(iii) in the case of property 
                        placed in service after December 31, 
                        2023, and before January 1, 2025, 60 
                        percent,
                            ``(iv) in the case of property 
                        placed in service after December 31, 
                        2024, and before January 1, 2026, 40 
                        percent, and
                            ``(v) in the case of property 
                        placed in service after December 31, 
                        2025, and before January 1, 2027, 20 
                        percent.
                    ``(B) Rule for property with longer 
                production periods.--In the case of property 
                described in subparagraph (B) or (C) of 
                paragraph (2), the term `applicable percentage' 
                means--
                            ``(i) in the case of property 
                        placed in service after September 27, 
                        2017, and before January 1, 2024, 100 
                        percent,
                            ``(ii) in the case of property 
                        placed in service after December 31, 
                        2023, and before January 1, 2025, 80 
                        percent,
                            ``(iii) in the case of property 
                        placed in service after December 31, 
                        2024, and before January 1, 2026, 60 
                        percent,
                            ``(iv) in the case of property 
                        placed in service after December 31, 
                        2025, and before January 1, 2027, 40 
                        percent, and
                            ``(v) in the case of property 
                        placed in service after December 31, 
                        2026, and before January 1, 2028, 20 
                        percent.
                    ``(C) Rule for plants bearing fruits and 
                nuts.--In the case of a specified plant 
                described in paragraph (5), the term 
                `applicable percentage' means--
                            ``(i) in the case of a plant which 
                        is planted or grafted after September 
                        27, 2017, and before January 1, 2023, 
                        100 percent,
                            ``(ii) in the case of a plant which 
                        is planted or grafted after December 
                        31, 2022, and before January 1, 2024, 
                        80 percent,
                            ``(iii) in the case of a plant 
                        which is planted or grafted after 
                        December 31, 2023, and before January 
                        1, 2025, 60 percent,
                            ``(iv) in the case of a plant which 
                        is planted or grafted after December 
                        31, 2024, and before January 1, 2026, 
                        40 percent, and
                            ``(v) in the case of a plant which 
                        is planted or grafted after December 
                        31, 2025, and before January 1, 2027, 
                        20 percent.''.
            (3) Conforming amendment.--
                    (A) Paragraph (5) of section 168(k) is 
                amended by striking subparagraph (F).
                    (B) Section 168(k) is amended by adding at 
                the end the following new paragraph:
            ``(8) Phase down.--In the case of qualified 
        property acquired by the taxpayer before September 28, 
        2017, and placed in service by the taxpayer after 
        September 27, 2017, paragraph (6) shall be applied by 
        substituting for each percentage therein--
                    ``(A) `50 percent' in the case of--
                            ``(i) property placed in service 
                        before January 1, 2018, and
                            ``(ii) property described in 
                        subparagraph (B) or (C) of paragraph 
                        (2) which is placed in service in 2018,
                    ``(B) `40 percent' in the case of--
                            ``(i) property placed in service in 
                        2018 (other than property described in 
                        subparagraph (B) or (C) of paragraph 
                        (2)), and
                            ``(ii) property described in 
                        subparagraph (B) or (C) of paragraph 
                        (2) which is placed in service in 2019,
                    ``(C) `30 percent' in the case of--
                            ``(i) property placed in service in 
                        2019 (other than property described in 
                        subparagraph (B) or (C) of paragraph 
                        (2)), and
                            ``(ii) property described in 
                        subparagraph (B) or (C) of paragraph 
                        (2) which is placed in service in 2020, 
                        and
                    ``(D) `0 percent' in the case of--
                            ``(i) property placed in service 
                        after 2019 (other than property 
                        described in subparagraph (B) or (C) of 
                        paragraph (2)), and
                            ``(ii) property described in 
                        subparagraph (B) or (C) of paragraph 
                        (2) which is placed in service after 
                        2020.''.
    (b) Extension.--
            (1) In general.--Section 168(k) is amended--
                    (A) in paragraph (2)--
                            (i) in subparagraph (A)(iii), 
                        clauses (i)(III) and (ii) of 
                        subparagraph (B), and subparagraph 
                        (E)(i), by striking ``January 1, 2020'' 
                        each place it appears and inserting 
                        ``January 1, 2027'', and
                            (ii) in subparagraph (B)--
                                    (I) in clause (i)(II), by 
                                striking ``January 1, 2021'' 
                                and inserting ``January 1, 
                                2028'', and
                                    (II) in the heading of 
                                clause (ii), by striking ``pre-
                                january 1, 2020'' and inserting 
                                ``pre-january 1, 2027'', and
                    (B) in paragraph (5)(A), by striking 
                ``January 1, 2020'' and inserting ``January 1, 
                2027''.
            (2) Conforming amendments.--
                    (A) Clause (ii) of section 460(c)(6)(B) is 
                amended by striking ``January 1, 2020 (January 
                1, 2021'' and inserting ``January 1, 2027 
                (January 1, 2028''.
                    (B) The heading of section 168(k) is 
                amended by striking ``Acquired After December 
                31, 2007, and Before January 1, 2020''.
    (c) Application to Used Property.--
            (1) In general.--Section 168(k)(2)(A)(ii) is 
        amended to read as follows:
                            ``(ii) the original use of which 
                        begins with the taxpayer or the 
                        acquisition of which by the taxpayer 
                        meets the requirements of clause (ii) 
                        of subparagraph (E), and''.
            (2) Acquisition requirements.--Section 
        168(k)(2)(E)(ii) is amended to read as follows:
                            ``(ii) Acquisition requirements.--
                        An acquisition of property meets the 
                        requirements of this clause if--
                                    ``(I) such property was not 
                                used by the taxpayer at any 
                                time prior to such acquisition, 
                                and
                                    ``(II) the acquisition of 
                                such property meets the 
                                requirements of paragraphs 
                                (2)(A), (2)(B), (2)(C), and (3) 
                                of section 179(d).'',
            (3) Anti-abuse rules.--Section 168(k)(2)(E) is 
        further amended by amending clause (iii)(I) to read as 
        follows:
                                    ``(I) property is used by a 
                                lessor of such property and 
                                such use is the lessor's first 
                                use of such property,''.
    (d) Exception for Certain Property.--Section 168(k), as 
amended by this section, is amended by adding at the end the 
following new paragraph:
            ``(9) Exception for certain property.--The term 
        `qualified property' shall not include--
                    ``(A) any property which is primarily used 
                in a trade or business described in clause (iv) 
                of section 163(j)(7)(A), or
                    ``(B) any property used in a trade or 
                business that has had floor plan financing 
                indebtedness (as defined in paragraph (9) of 
                section 163(j)), if the floor plan financing 
                interest related to such indebtedness was taken 
                into account under paragraph (1)(C) of such 
                section.''.
    (e) Special Rule.--Section 168(k), as amended by this 
section, is amended by adding at the end the following new 
paragraph:
            ``(10) Special rule for property placed in service 
        during certain periods.--
                    ``(A) In general.--In the case of qualified 
                property placed in service by the taxpayer 
                during the first taxable year ending after 
                September 27, 2017, if the taxpayer elects to 
                have this paragraph apply for such taxable 
                year, paragraphs (1)(A) and (5)(A)(i) shall be 
                applied by substituting `50 percent' for `the 
                applicable percentage'.
                    ``(B) Form of election.--Any election under 
                this paragraph shall be made at such time and 
                in such form and manner as the Secretary may 
                prescribe.''.
    (f) Coordination With Section 280F.--Clause (iii) of 
section 168(k)(2)(F) is amended by striking ``placed in service 
by the taxpayer after December 31, 2017'' and inserting 
``acquired by the taxpayer before September 28, 2017, and 
placed in service by the taxpayer after September 27, 2017''.
    (g) Qualified Film and Television and Live Theatrical 
Productions.--
            (1) In general.--Clause (i) of section 
        168(k)(2)(A), as amended by section 13204, is amended--
                    (A) in subclause (II), by striking ``or'',
                    (B) in subclause (III), by adding ``or'' 
                after the comma, and
                    (C) by adding at the end the following:
                            ``(IV) which is a qualified film or 
                        television production (as defined in 
                        subsection (d) of section 181) for 
                        which a deduction would have been 
                        allowable under section 181 without 
                        regard to subsections (a)(2) and (g) of 
                        such section or this subsection, or
                            ``(V) which is a qualified live 
                        theatrical production (as defined in 
                        subsection (e) of section 181) for 
                        which a deduction would have been 
                        allowable under section 181 without 
                        regard to subsections (a)(2) and (g) of 
                        such section or this subsection,''.
            (2) Production placed in service.--Paragraph (2) of 
        section 168(k) is amended by adding at the end the 
        following:
                    ``(H) Production placed in service.--For 
                purposes of subparagraph (A)--
                            ``(i) a qualified film or 
                        television production shall be 
                        considered to be placed in service at 
                        the time of initial release or 
                        broadcast, and
                            ``(ii) a qualified live theatrical 
                        production shall be considered to be 
                        placed in service at the time of the 
                        initial live staged performance.''.
    (h) Effective Date.--
            (1) In general.--Except as provided by paragraph 
        (2), the amendments made by this section shall apply to 
        property which--
                    (A) is acquired after September 27, 2017, 
                and
                    (B) is placed in service after such date.
        For purposes of the preceding sentence, property shall 
        not be treated as acquired after the date on which a 
        written binding contract is entered into for such 
        acquisition.
            (2) Specified plants.--The amendments made by this 
        section shall apply to specified plants planted or 
        grafted after September 27, 2017.

SEC. 13202. MODIFICATIONS TO DEPRECIATION LIMITATIONS ON LUXURY 
                    AUTOMOBILES AND PERSONAL USE PROPERTY.

    (a) Luxury Automobiles.--
            (1) In general.--280F(a)(1)(A) is amended--
                    (A) in clause (i), by striking ``$2,560'' 
                and inserting ``$10,000'',
                    (B) in clause (ii), by striking ``$4,100'' 
                and inserting ``$16,000'',
                    (C) in clause (iii), by striking ``$2,450'' 
                and inserting ``$9,600'', and
                    (D) in clause (iv), by striking ``$1,475'' 
                and inserting ``$5,760''.
            (2) Conforming amendments.--
                    (A) Clause (ii) of section 280F(a)(1)(B) is 
                amended by striking ``$1,475'' in the text and 
                heading and inserting ``$5,760''.
                    (B) Paragraph (7) of section 280F(d) is 
                amended--
                            (i) in subparagraph (A), by 
                        striking ``1988'' and inserting 
                        ``2018'', and
                            (ii) in subparagraph (B)(i)(II), by 
                        striking ``1987'' and inserting 
                        ``2017''.
    (b) Removal of Computer Equipment From Listed Property.--
            (1) In general.--Section 280F(d)(4)(A) is amended--
                    (A) by inserting ``and'' at the end of 
                clause (iii),
                    (B) by striking clause (iv), and
                    (C) by redesignating clause (v) as clause 
                (iv).
            (2) Conforming amendment.--Section 280F(d)(4) is 
        amended by striking subparagraph (B) and by 
        redesignating subparagraph (C) as subparagraph (B).
    (c) Effective Date.--The amendments made by this section 
shall apply to property placed in service after December 31, 
2017, in taxable years ending after such date.

SEC. 13203. MODIFICATIONS OF TREATMENT OF CERTAIN FARM PROPERTY.

    (a) Treatment of Certain Farm Property as 5-Year 
Property.--Clause (vii) of section 168(e)(3)(B) is amended by 
striking ``after December 31, 2008, and which is placed in 
service before January 1, 2010'' and inserting ``after December 
31, 2017''.
    (b) Repeal of Required Use of 150-Percent Declining Balance 
Method.--Section 168(b)(2) is amended by striking subparagraph 
(B) and by redesignating subparagraphs (C) and (D) as 
subparagraphs (B) and (C), respectively.
    (c) Effective Date.--The amendments made by this section 
shall apply to property placed in service after December 31, 
2017, in taxable years ending after such date.

SEC. 13204. APPLICABLE RECOVERY PERIOD FOR REAL PROPERTY.

    (a) Improvements to Real Property.--
            (1) Elimination of qualified leasehold improvement, 
        qualified restaurant, and qualified retail improvement 
        property.--Subsection (e) of section 168 is amended--
                    (A) in subparagraph (E) of paragraph (3)--
                            (i) by striking clauses (iv), (v), 
                        and (ix),
                            (ii) in clause (vii), by inserting 
                        ``and'' at the end,
                            (iii) in clause (viii), by striking 
                        ``, and'' and inserting a period, and
                            (iv) by redesignating clauses (vi), 
                        (vii), and (viii), as so amended, as 
                        clauses (iv), (v), and (vi), 
                        respectively, and
                    (B) by striking paragraphs (6), (7), and 
                (8).
            (2) Application of straight line method to 
        qualified improvement property.--Paragraph (3) of 
        section 168(b) is amended--
                    (A) by striking subparagraphs (G), (H), and 
                (I), and
                    (B) by inserting after subparagraph (F) the 
                following new subparagraph:
                    ``(G) Qualified improvement property 
                described in subsection (e)(6).''.
            (3) Alternative depreciation system.--
                    (A) Electing real property trade or 
                business.--Subsection (g) of section 168 is 
                amended--
                            (i) in paragraph (1)--
                                    (I) in subparagraph (D), by 
                                striking ``and'' at the end,
                                    (II) in subparagraph (E), 
                                by inserting ``and'' at the 
                                end, and
                                    (III) by inserting after 
                                subparagraph (E) the following 
                                new subparagraph:
                    ``(F) any property described in paragraph 
                (8),'', and
                            (ii) by adding at the end the 
                        following new paragraph:
            ``(8) Electing real property trade or business.--
        The property described in this paragraph shall consist 
        of any nonresidential real property, residential rental 
        property, and qualified improvement property held by an 
        electing real property trade or business (as defined in 
        163(j)(7)(B)).''.
                    (B) Qualified improvement property.--The 
                table contained in subparagraph (B) of section 
                168(g)(3) is amended--
                            (i) by inserting after the item 
                        relating to subparagraph (D)(ii) the 
                        following new item:

    ``(D)(v)..................................................      20''

                                    , and
                            (ii) by striking the item relating 
                        to subparagraph (E)(iv) and all that 
                        follows through the item relating to 
                        subparagraph (E)(ix) and inserting the 
                        following:

    ``(E)(iv).................................................       20 
    (E)(v)....................................................       30 
    (E)(vi)...................................................     35''.

                    (C) Applicable recovery period for 
                residential rental property.--The table 
                contained in subparagraph (C) of section 
                168(g)(2) is amended by striking clauses (iii) 
                and (iv) and inserting the following:

    ``(iii) Residential rental property....................... 30 years 
    (iv) Nonresidential real property......................... 40 years 
    (v) Any railroad grading or tunnel bore or water utility 
      property...............................................50 years''.

            (4) Conforming amendments.--
                    (A) Clause (i) of section 168(k)(2)(A) is 
                amended--
                            (i) in subclause (II), by inserting 
                        ``or'' after the comma,
                            (ii) in subclause (III), by 
                        striking ``or'' at the end, and
                            (iii) by striking subclause (IV).
                    (B) Section 168 is amended--
                            (i) in subsection (e), as amended 
                        by paragraph (1)(B), by adding at the 
                        end the following:
            ``(6) Qualified improvement property.--
                    ``(A) In general.--The term `qualified 
                improvement property' means any improvement to 
                an interior portion of a building which is 
                nonresidential real property if such 
                improvement is placed in service after the date 
                such building was first placed in service.
                    ``(B) Certain improvements not included.--
                Such term shall not include any improvement for 
                which the expenditure is attributable to--
                            ``(i) the enlargement of the 
                        building,
                            ``(ii) any elevator or escalator, 
                        or
                            ``(iii) the internal structural 
                        framework of the building.'', and
                            (ii) in subsection (k), by striking 
                        paragraph (3).
    (b) Effective Date.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        property placed in service after December 31, 2017.
            (2) Amendments related to electing real property 
        trade or business.--The amendments made by subsection 
        (a)(3)(A) shall apply to taxable years beginning after 
        December 31, 2017.

SEC. 13205. USE OF ALTERNATIVE DEPRECIATION SYSTEM FOR ELECTING FARMING 
                    BUSINESSES.

    (a) In General.--Section 168(g)(1), as amended by section 
13204, is amended by striking ``and'' at the end of 
subparagraph (E), by inserting ``and'' at the end of 
subparagraph (F), and by inserting after subparagraph (F) the 
following new subparagraph:
                    ``(G) any property with a recovery period 
                of 10 years or more which is held by an 
                electing farming business (as defined in 
                section 163(j)(7)(C)),''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13206. AMORTIZATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES.

    (a) In General.--Section 174 is amended to read as follows:

``SEC. 174. AMORTIZATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES.

    ``(a) In General.--In the case of a taxpayer's specified 
research or experimental expenditures for any taxable year--
            ``(1) except as provided in paragraph (2), no 
        deduction shall be allowed for such expenditures, and
            ``(2) the taxpayer shall--
                    ``(A) charge such expenditures to capital 
                account, and
                    ``(B) be allowed an amortization deduction 
                of such expenditures ratably over the 5-year 
                period (15-year period in the case of any 
                specified research or experimental expenditures 
                which are attributable to foreign research 
                (within the meaning of section 41(d)(4)(F))) 
                beginning with the midpoint of the taxable year 
                in which such expenditures are paid or 
                incurred.
    ``(b) Specified Research or Experimental Expenditures.--For 
purposes of this section, the term `specified research or 
experimental expenditures' means, with respect to any taxable 
year, research or experimental expenditures which are paid or 
incurred by the taxpayer during such taxable year in connection 
with the taxpayer's trade or business.
    ``(c) Special Rules.--
            ``(1) Land and other property.--This section shall 
        not apply to any expenditure for the acquisition or 
        improvement of land, or for the acquisition or 
        improvement of property to be used in connection with 
        the research or experimentation and of a character 
        which is subject to the allowance under section 167 
        (relating to allowance for depreciation, etc.) or 
        section 611 (relating to allowance for depletion); but 
        for purposes of this section allowances under section 
        167, and allowances under section 611, shall be 
        considered as expenditures.
            ``(2) Exploration expenditures.--This section shall 
        not apply to any expenditure paid or incurred for the 
        purpose of ascertaining the existence, location, 
        extent, or quality of any deposit of ore or other 
        mineral (including oil and gas).
            ``(3) Software development.--For purposes of this 
        section, any amount paid or incurred in connection with 
        the development of any software shall be treated as a 
        research or experimental expenditure.
    ``(d) Treatment Upon Disposition, Retirement, or 
Abandonment.--If any property with respect to which specified 
research or experimental expenditures are paid or incurred is 
disposed, retired, or abandoned during the period during which 
such expenditures are allowed as an amortization deduction 
under this section, no deduction shall be allowed with respect 
to such expenditures on account of such disposition, 
retirement, or abandonment and such amortization deduction 
shall continue with respect to such expenditures.''.
    (b) Change in Method of Accounting.--The amendments made by 
subsection (a) shall be treated as a change in method of 
accounting for purposes of section 481 of the Internal Revenue 
Code of 1986 and--
            (1) such change shall be treated as initiated by 
        the taxpayer,
            (2) such change shall be treated as made with the 
        consent of the Secretary, and
            (3) such change shall be applied only on a cut-off 
        basis for any research or experimental expenditures 
        paid or incurred in taxable years beginning after 
        December 31, 2021, and no adjustments under section 
        481(a) shall be made.
    (c) Clerical Amendment.--The table of sections for part VI 
of subchapter B of chapter 1 is amended by striking the item 
relating to section 174 and inserting the following new item:

``Sec. 174. Amortization of research and experimental expenditures.''.

    (d) Conforming Amendments.--
            (1) Section 41(d)(1)(A) is amended by striking 
        ``expenses under section 174'' and inserting 
        ``specified research or experimental expenditures under 
        section 174''.
            (2) Subsection (c) of section 280C is amended--
                    (A) by striking paragraph (1) and inserting 
                the following:
            ``(1) In general.--If--
                    ``(A) the amount of the credit determined 
                for the taxable year under section 41(a)(1), 
                exceeds
                    ``(B) the amount allowable as a deduction 
                for such taxable year for qualified research 
                expenses or basic research expenses,
        the amount chargeable to capital account for the 
        taxable year for such expenses shall be reduced by the 
        amount of such excess.'',
                    (B) by striking paragraph (2),
                    (C) by redesignating paragraphs (3) (as 
                amended by this Act) and (4) as paragraphs (2) 
                and (3), respectively, and
                    (D) in paragraph (2), as redesignated by 
                subparagraph (C), by striking ``paragraphs (1) 
                and (2)'' and inserting ``paragraph (1)''.
    (e) Effective Date.--The amendments made by this section 
shall apply to amounts paid or incurred in taxable years 
beginning after December 31, 2021.

SEC. 13207. EXPENSING OF CERTAIN COSTS OF REPLANTING CITRUS PLANTS LOST 
                    BY REASON OF CASUALTY.

    (a) In General.--Section 263A(d)(2) is amended by adding at 
the end the following new subparagraph:
                    ``(C) Special temporary rule for citrus 
                plants lost by reason of casualty.--
                            ``(i) In general.--In the case of 
                        the replanting of citrus plants, 
                        subparagraph (A) shall apply to amounts 
                        paid or incurred by a person (other 
                        than the taxpayer described in 
                        subparagraph (A)) if--
                                    ``(I) the taxpayer 
                                described in subparagraph (A) 
                                has an equity interest of not 
                                less than 50 percent in the 
                                replanted citrus plants at all 
                                times during the taxable year 
                                in which such amounts were paid 
                                or incurred and such other 
                                person holds any part of the 
                                remaining equity interest, or
                                    ``(II) such other person 
                                acquired the entirety of such 
                                taxpayer's equity interest in 
                                the land on which the lost or 
                                damaged citrus plants were 
                                located at the time of such 
                                loss or damage, and the 
                                replanting is on such land.
                            ``(ii) Termination.--Clause (i) 
                        shall not apply to any cost paid or 
                        incurred after the date which is 10 
                        years after the date of the enactment 
                        of the Tax Cuts and Jobs Act.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to costs paid or incurred after the date of the 
enactment of this Act.

                     Subpart B--Accounting Methods

SEC. 13221. CERTAIN SPECIAL RULES FOR TAXABLE YEAR OF INCLUSION.

    (a) Inclusion Not Later Than for Financial Accounting 
Purposes.--Section 451 is amended by redesignating subsections 
(b) through (i) as subsections (c) through (j), respectively, 
and by inserting after subsection (a) the following new 
subsection:
    ``(b) Inclusion Not Later Than for Financial Accounting 
Purposes.--
            ``(1) Income taken into account in financial 
        statement.--
                    ``(A) In general.--In the case of a 
                taxpayer the taxable income of which is 
                computed under an accrual method of accounting, 
                the all events test with respect to any item of 
                gross income (or portion thereof) shall not be 
                treated as met any later than when such item 
                (or portion thereof) is taken into account as 
                revenue in--
                            ``(i) an applicable financial 
                        statement of the taxpayer, or
                            ``(ii) such other financial 
                        statement as the Secretary may specify 
                        for purposes of this subsection.
                    ``(B) Exception.--This paragraph shall not 
                apply to--
                            ``(i) a taxpayer which does not 
                        have a financial statement described in 
                        clause (i) or (ii) of subparagraph (A) 
                        for a taxable year, or
                            ``(ii) any item of gross income in 
                        connection with a mortgage servicing 
                        contract.
                    ``(C) All events test.--For purposes of 
                this section, the all events test is met with 
                respect to any item of gross income if all the 
                events have occurred which fix the right to 
                receive such income and the amount of such 
                income can be determined with reasonable 
                accuracy.
            ``(2) Coordination with special methods of 
        accounting.--Paragraph (1) shall not apply with respect 
        to any item of gross income for which the taxpayer uses 
        a special method of accounting provided under any other 
        provision of this chapter, other than any provision of 
        part V of subchapter P (except as provided in clause 
        (ii) of paragraph (1)(B)).
            ``(3) Applicable financial statement.--For purposes 
        of this subsection, the term `applicable financial 
        statement' means--
                    ``(A) a financial statement which is 
                certified as being prepared in accordance with 
                generally accepted accounting principles and 
                which is--
                            ``(i) a 10-K (or successor form), 
                        or annual statement to shareholders, 
                        required to be filed by the taxpayer 
                        with the United States Securities and 
                        Exchange Commission,
                            ``(ii) an audited financial 
                        statement of the taxpayer which is used 
                        for--
                                    ``(I) credit purposes,
                                    ``(II) reporting to 
                                shareholders, partners, or 
                                other proprietors, or to 
                                beneficiaries, or
                                    ``(III) any other 
                                substantial nontax purpose,
                        but only if there is no statement of 
                        the taxpayer described in clause (i), 
                        or
                            ``(iii) filed by the taxpayer with 
                        any other Federal agency for purposes 
                        other than Federal tax purposes, but 
                        only if there is no statement of the 
                        taxpayer described in clause (i) or 
                        (ii),
                    ``(B) a financial statement which is made 
                on the basis of international financial 
                reporting standards and is filed by the 
                taxpayer with an agency of a foreign government 
                which is equivalent to the United States 
                Securities and Exchange Commission and which 
                has reporting standards not less stringent than 
                the standards required by such Commission, but 
                only if there is no statement of the taxpayer 
                described in subparagraph (A), or
                    ``(C) a financial statement filed by the 
                taxpayer with any other regulatory or 
                governmental body specified by the Secretary, 
                but only if there is no statement of the 
                taxpayer described in subparagraph (A) or (B).
            ``(4) Allocation of transaction price.--For 
        purposes of this subsection, in the case of a contract 
        which contains multiple performance obligations, the 
        allocation of the transaction price to each performance 
        obligation shall be equal to the amount allocated to 
        each performance obligation for purposes of including 
        such item in revenue in the applicable financial 
        statement of the taxpayer.
            ``(5) Group of entities.--For purposes of paragraph 
        (1), if the financial results of a taxpayer are 
        reported on the applicable financial statement (as 
        defined in paragraph (3)) for a group of entities, such 
        statement shall be treated as the applicable financial 
        statement of the taxpayer.''.
    (b) Treatment of Advance Payments.--Section 451, as amended 
by subsection (a), is amended by redesignating subsections (c) 
through (j) as subsections (d) through (k), respectively, and 
by inserting after subsection (b) the following new subsection:
    ``(c) Treatment of Advance Payments.--
            ``(1) In general.--A taxpayer which computes 
        taxable income under the accrual method of accounting, 
        and receives any advance payment during the taxable 
        year, shall--
                    ``(A) except as provided in subparagraph 
                (B), include such advance payment in gross 
                income for such taxable year, or
                    ``(B) if the taxpayer elects the 
                application of this subparagraph with respect 
                to the category of advance payments to which 
                such advance payment belongs, the taxpayer 
                shall--
                            ``(i) to the extent that any 
                        portion of such advance payment is 
                        required under subsection (b) to be 
                        included in gross income in the taxable 
                        year in which such payment is received, 
                        so include such portion, and
                            ``(ii) include the remaining 
                        portion of such advance payment in 
                        gross income in the taxable year 
                        following the taxable year in which 
                        such payment is received.
            ``(2) Election.--
                    ``(A) In general.--Except as otherwise 
                provided in this paragraph, the election under 
                paragraph (1)(B) shall be made at such time, in 
                such form and manner, and with respect to such 
                categories of advance payments, as the 
                Secretary may provide.
                    ``(B) Period to which election applies.--An 
                election under paragraph (1)(B) shall be 
                effective for the taxable year with respect to 
                which it is first made and for all subsequent 
                taxable years, unless the taxpayer secures the 
                consent of the Secretary to revoke such 
                election. For purposes of this title, the 
                computation of taxable income under an election 
                made under paragraph (1)(B) shall be treated as 
                a method of accounting.
            ``(3) Taxpayers ceasing to exist.--Except as 
        otherwise provided by the Secretary, the election under 
        paragraph (1)(B) shall not apply with respect to 
        advance payments received by the taxpayer during a 
        taxable year if such taxpayer ceases to exist during 
        (or with the close of) such taxable year.
            ``(4) Advance payment.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `advance 
                payment' means any payment--
                            ``(i) the full inclusion of which 
                        in the gross income of the taxpayer for 
                        the taxable year of receipt is a 
                        permissible method of accounting under 
                        this section (determined without regard 
                        to this subsection),
                            ``(ii) any portion of which is 
                        included in revenue by the taxpayer in 
                        a financial statement described in 
                        clause (i) or (ii) of subsection 
                        (b)(1)(A) for a subsequent taxable 
                        year, and
                            ``(iii) which is for goods, 
                        services, or such other items as may be 
                        identified by the Secretary for 
                        purposes of this clause.
                    ``(B) Exclusions.--Except as otherwise 
                provided by the Secretary, such term shall not 
                include--
                            ``(i) rent,
                            ``(ii) insurance premiums governed 
                        by subchapter L,
                            ``(iii) payments with respect to 
                        financial instruments,
                            ``(iv) payments with respect to 
                        warranty or guarantee contracts under 
                        which a third party is the primary 
                        obligor,
                            ``(v) payments subject to section 
                        871(a), 881, 1441, or 1442,
                            ``(vi) payments in property to 
                        which section 83 applies, and
                            ``(vii) any other payment 
                        identified by the Secretary for 
                        purposes of this subparagraph.
                    ``(C) Receipt.--For purposes of this 
                subsection, an item of gross income is received 
                by the taxpayer if it is actually or 
                constructively received, or if it is due and 
                payable to the taxpayer.
                    ``(D) Allocation of transaction price.--For 
                purposes of this subsection, rules similar to 
                subsection (b)(4) shall apply.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.
    (d) Coordination With Section 481.--
            (1) In general.--In the case of any qualified 
        change in method of accounting for the taxpayer's first 
        taxable year beginning after December 31, 2017--
                    (A) such change shall be treated as 
                initiated by the taxpayer, and
                    (B) such change shall be treated as made 
                with the consent of the Secretary of the 
                Treasury.
            (2) Qualified change in method of accounting.--For 
        purposes of this subsection, the term ``qualified 
        change in method of accounting'' means any change in 
        method of accounting which--
                    (A) is required by the amendments made by 
                this section, or
                    (B) was prohibited under the Internal 
                Revenue Code of 1986 prior to such amendments 
                and is permitted under such Code after such 
                amendments.
    (e) Special Rules for Original Issue Discount.--
Notwithstanding subsection (c), in the case of income from a 
debt instrument having original issue discount--
            (1) the amendments made by this section shall apply 
        to taxable years beginning after December 31, 2018, and
            (2) the period for taking into account any 
        adjustments under section 481 by reason of a qualified 
        change in method of accounting (as defined in 
        subsection (d)) shall be 6 years.

          PART IV--BUSINESS-RELATED EXCLUSIONS AND DEDUCTIONS

SEC. 13301. LIMITATION ON DEDUCTION FOR INTEREST.

    (a) In General.--Section 163(j) is amended to read as 
follows:
    ``(j) Limitation on Business Interest.--
            ``(1) In general.--The amount allowed as a 
        deduction under this chapter for any taxable year for 
        business interest shall not exceed the sum of--
                    ``(A) the business interest income of such 
                taxpayer for such taxable year,
                    ``(B) 30 percent of the adjusted taxable 
                income of such taxpayer for such taxable year, 
                plus
                    ``(C) the floor plan financing interest of 
                such taxpayer for such taxable year.
        The amount determined under subparagraph (B) shall not 
        be less than zero.
            ``(2) Carryforward of disallowed business 
        interest.--The amount of any business interest not 
        allowed as a deduction for any taxable year by reason 
        of paragraph (1) shall be treated as business interest 
        paid or accrued in the succeeding taxable year.
            ``(3) Exemption for certain small businesses.--In 
        the case of any taxpayer (other than a tax shelter 
        prohibited from using the cash receipts and 
        disbursements method of accounting under section 
        448(a)(3)) which meets the gross receipts test of 
        section 448(c) for any taxable year, paragraph (1) 
        shall not apply to such taxpayer for such taxable year. 
        In the case of any taxpayer which is not a corporation 
        or a partnership, the gross receipts test of section 
        448(c) shall be applied in the same manner as if such 
        taxpayer were a corporation or partnership.
            ``(4) Application to partnerships, etc.--
                    ``(A) In general.--In the case of any 
                partnership--
                            ``(i) this subsection shall be 
                        applied at the partnership level and 
                        any deduction for business interest 
                        shall be taken into account in 
                        determining the non-separately stated 
                        taxable income or loss of the 
                        partnership, and
                            ``(ii) the adjusted taxable income 
                        of each partner of such partnership--
                                    ``(I) shall be determined 
                                without regard to such 
                                partner's distributive share of 
                                any items of income, gain, 
                                deduction, or loss of such 
                                partnership, and
                                    ``(II) shall be increased 
                                by such partner's distributive 
                                share of such partnership's 
                                excess taxable income.
                        For purposes of clause (ii)(II), a 
                        partner's distributive share of 
                        partnership excess taxable income shall 
                        be determined in the same manner as the 
                        partner's distributive share of 
                        nonseparately stated taxable income or 
                        loss of the partnership.
                    ``(B) Special rules for carryforwards.--
                            ``(i) In general.--The amount of 
                        any business interest not allowed as a 
                        deduction to a partnership for any 
                        taxable year by reason of paragraph (1) 
                        for any taxable year--
                                    ``(I) shall not be treated 
                                under paragraph (2) as business 
                                interest paid or accrued by the 
                                partnership in the succeeding 
                                taxable year, and
                                    ``(II) shall, subject to 
                                clause (ii), be treated as 
                                excess business interest which 
                                is allocated to each partner in 
                                the same manner as the non-
                                separately stated taxable 
                                income or loss of the 
                                partnership.
                            ``(ii) Treatment of excess business 
                        interest allocated to partners.--If a 
                        partner is allocated any excess 
                        business interest from a partnership 
                        under clause (i) for any taxable year--
                                    ``(I) such excess business 
                                interest shall be treated as 
                                business interest paid or 
                                accrued by the partner in the 
                                next succeeding taxable year in 
                                which the partner is allocated 
                                excess taxable income from such 
                                partnership, but only to the 
                                extent of such excess taxable 
                                income, and
                                    ``(II) any portion of such 
                                excess business interest 
                                remaining after the application 
                                of subclause (I) shall, subject 
                                to the limitations of subclause 
                                (I), be treated as business 
                                interest paid or accrued in 
                                succeeding taxable years.
                        For purposes of applying this 
                        paragraph, excess taxable income 
                        allocated to a partner from a 
                        partnership for any taxable year shall 
                        not be taken into account under 
                        paragraph (1)(A) with respect to any 
                        business interest other than excess 
                        business interest from the partnership 
                        until all such excess business interest 
                        for such taxable year and all preceding 
                        taxable years has been treated as paid 
                        or accrued under clause (ii).
                            ``(iii) Basis adjustments.--
                                    ``(I) In general.--The 
                                adjusted basis of a partner in 
                                a partnership interest shall be 
                                reduced (but not below zero) by 
                                the amount of excess business 
                                interest allocated to the 
                                partner under clause (i)(II).
                                    ``(II) Special rule for 
                                dispositions.--If a partner 
                                disposes of a partnership 
                                interest, the adjusted basis of 
                                the partner in the partnership 
                                interest shall be increased 
                                immediately before the 
                                disposition by the amount of 
                                the excess (if any) of the 
                                amount of the basis reduction 
                                under subclause (I) over the 
                                portion of any excess business 
                                interest allocated to the 
                                partner under clause (i)(II) 
                                which has previously been 
                                treated under clause (ii) as 
                                business interest paid or 
                                accrued by the partner. The 
                                preceding sentence shall also 
                                apply to transfers of the 
                                partnership interest (including 
                                by reason of death) in a 
                                transaction in which gain is 
                                not recognized in whole or in 
                                part. No deduction shall be 
                                allowed to the transferor or 
                                transferee under this chapter 
                                for any excess business 
                                interest resulting in a basis 
                                increase under this subclause.
                    ``(C) Excess taxable income.--The term 
                `excess taxable income' means, with respect to 
                any partnership, the amount which bears the 
                same ratio to the partnership's adjusted 
                taxable income as--
                            ``(i) the excess (if any) of--
                                    ``(I) the amount determined 
                                for the partnership under 
                                paragraph (1)(B), over
                                    ``(II) the amount (if any) 
                                by which the business interest 
                                of the partnership, reduced by 
                                the floor plan financing 
                                interest, exceeds the business 
                                interest income of the 
                                partnership, bears to
                            ``(ii) the amount determined for 
                        the partnership under paragraph (1)(B).
                    ``(D) Application to s corporations.--Rules 
                similar to the rules of subparagraphs (A) and 
                (C) shall apply with respect to any S 
                corporation and its shareholders.
            ``(5) Business interest.--For purposes of this 
        subsection, the term `business interest' means any 
        interest paid or accrued on indebtedness properly 
        allocable to a trade or business. Such term shall not 
        include investment interest (within the meaning of 
        subsection (d)).
            ``(6) Business interest income.--For purposes of 
        this subsection, the term `business interest income' 
        means the amount of interest includible in the gross 
        income of the taxpayer for the taxable year which is 
        properly allocable to a trade or business. Such term 
        shall not include investment income (within the meaning 
        of subsection (d)).
            ``(7) Trade or business.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `trade or 
                business' shall not include--
                            ``(i) the trade or business of 
                        performing services as an employee,
                            ``(ii) any electing real property 
                        trade or business,
                            ``(iii) any electing farming 
                        business, or
                            ``(iv) the trade or business of the 
                        furnishing or sale of--
                                    ``(I) electrical energy, 
                                water, or sewage disposal 
                                services,
                                    ``(II) gas or steam through 
                                a local distribution system, or
                                    ``(III) transportation of 
                                gas or steam by pipeline,
                        if the rates for such furnishing or 
                        sale, as the case may be, have been 
                        established or approved by a State or 
                        political subdivision thereof, by any 
                        agency or instrumentality of the United 
                        States, by a public service or public 
                        utility commission or other similar 
                        body of any State or political 
                        subdivision thereof, or by the 
                        governing or ratemaking body of an 
                        electric cooperative.
                    ``(B) Electing real property trade or 
                business.--For purposes of this paragraph, the 
                term `electing real property trade or business' 
                means any trade or business which is described 
                in section 469(c)(7)(C) and which makes an 
                election under this subparagraph. Any such 
                election shall be made at such time and in such 
                manner as the Secretary shall prescribe, and, 
                once made, shall be irrevocable.
                    ``(C) Electing farming business.--For 
                purposes of this paragraph, the term `electing 
                farming business' means--
                            ``(i) a farming business (as 
                        defined in section 263A(e)(4)) which 
                        makes an election under this 
                        subparagraph, or
                            ``(ii) any trade or business of a 
                        specified agricultural or horticultural 
                        cooperative (as defined in section 
                        199A(g)(2)) with respect to which the 
                        cooperative makes an election under 
                        this subparagraph.
                Any such election shall be made at such time 
                and in such manner as the Secretary shall 
                prescribe, and, once made, shall be 
                irrevocable.
            ``(8) Adjusted taxable income.--For purposes of 
        this subsection, the term `adjusted taxable income' 
        means the taxable income of the taxpayer--
                    ``(A) computed without regard to--
                            ``(i) any item of income, gain, 
                        deduction, or loss which is not 
                        properly allocable to a trade or 
                        business,
                            ``(ii) any business interest or 
                        business interest income,
                            ``(iii) the amount of any net 
                        operating loss deduction under section 
                        172,
                            ``(iv) the amount of any deduction 
                        allowed under section 199A, and
                            ``(v) in the case of taxable years 
                        beginning before January 1, 2022, any 
                        deduction allowable for depreciation, 
                        amortization, or depletion, and
                    ``(B) computed with such other adjustments 
                as provided by the Secretary.
            ``(9) Floor plan financing interest defined.--For 
        purposes of this subsection--
                    ``(A) In general.--The term `floor plan 
                financing interest' means interest paid or 
                accrued on floor plan financing indebtedness.
                    ``(B) Floor plan financing indebtedness.--
                The term `floor plan financing indebtedness' 
                means indebtedness--
                            ``(i) used to finance the 
                        acquisition of motor vehicles held for 
                        sale or lease, and
                            ``(ii) secured by the inventory so 
                        acquired.
                    ``(C) Motor vehicle.--The term `motor 
                vehicle' means a motor vehicle that is any of 
                the following:
                            ``(i) Any self-propelled vehicle 
                        designed for transporting persons or 
                        property on a public street, highway, 
                        or road.
                            ``(ii) A boat.
                            ``(iii) Farm machinery or 
                        equipment.
            ``(10) Cross references.--
                    ``(A) For requirement that an electing real 
                property trade or business use the alternative 
                depreciation system, see section 168(g)(1)(F).
                    ``(B) For requirement that an electing 
                farming business use the alternative 
                depreciation system, see section 
                168(g)(1)(G).''.
    (b) Treatment of Carryforward of Disallowed Business 
Interest in Certain Corporate Acquisitions.--
            (1) In general.--Section 381(c) is amended by 
        inserting after paragraph (19) the following new 
        paragraph:
            ``(20) Carryforward of disallowed business 
        interest.--The carryover of disallowed business 
        interest described in section 163(j)(2) to taxable 
        years ending after the date of distribution or 
        transfer.''.
            (2) Application of limitation.--Section 382(d) is 
        amended by adding at the end the following new 
        paragraph:
            ``(3) Application to carryforward of disallowed 
        interest.--The term `pre-change loss' shall include any 
        carryover of disallowed interest described in section 
        163(j)(2) under rules similar to the rules of paragraph 
        (1).''.
            (3) Conforming amendment.--Section 382(k)(1) is 
        amended by inserting after the first sentence the 
        following: ``Such term shall include any corporation 
        entitled to use a carryforward of disallowed interest 
        described in section 381(c)(20).''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13302. MODIFICATION OF NET OPERATING LOSS DEDUCTION.

    (a) Limitation on Deduction.--
            (1) In general.--Section 172(a) is amended to read 
        as follows:
    ``(a) Deduction Allowed.--There shall be allowed as a 
deduction for the taxable year an amount equal to the lesser 
of--
            ``(1) the aggregate of the net operating loss 
        carryovers to such year, plus the net operating loss 
        carrybacks to such year, or
            ``(2) 80 percent of taxable income computed without 
        regard to the deduction allowable under this section.
For purposes of this subtitle, the term `net operating loss 
deduction' means the deduction allowed by this subsection.''.
            (2) Coordination of limitation with carrybacks and 
        carryovers.--Section 172(b)(2) is amended by striking 
        ``shall be computed--'' and all that follows and 
        inserting ``shall--
                    ``(A) be computed with the modifications 
                specified in subsection (d) other than 
                paragraphs (1), (4), and (5) thereof, and by 
                determining the amount of the net operating 
                loss deduction without regard to the net 
                operating loss for the loss year or for any 
                taxable year thereafter,
                    ``(B) not be considered to be less than 
                zero, and
                    ``(C) not exceed the amount determined 
                under subsection (a)(2) for such prior taxable 
                year.''.
            (3) Conforming amendment.--Section 172(d)(6) is 
        amended by striking ``and'' at the end of subparagraph 
        (A), by striking the period at the end of subparagraph 
        (B) and inserting ``; and'', and by adding at the end 
        the following new subparagraph:
                    ``(C) subsection (a)(2) shall be applied by 
                substituting `real estate investment trust 
                taxable income (as defined in section 857(b)(2) 
                but without regard to the deduction for 
                dividends paid (as defined in section 561))' 
                for `taxable income'.''.
    (b) Repeal of Net Operating Loss Carryback; Indefinite 
Carryforward.--
            (1) In general.--Section 172(b)(1)(A) is amended--
                    (A) by striking ``shall be a net operating 
                loss carryback to each of the 2 taxable years'' 
                in clause (i) and inserting ``except as 
                otherwise provided in this paragraph, shall not 
                be a net operating loss carryback to any 
                taxable year'', and
                    (B) by striking ``to each of the 20 taxable 
                years'' in clause (ii) and inserting ``to each 
                taxable year''.
            (2) Conforming amendment.--Section 172(b)(1) is 
        amended by striking subparagraphs (B) through (F).
    (c) Treatment of Farming Losses.--
            (1) Allowance of carrybacks.--Section 172(b)(1), as 
        amended by subsection (b)(2), is amended by adding at 
        the end the following new subparagraph:
                    ``(B) Farming losses.--
                            ``(i) In general.--In the case of 
                        any portion of a net operating loss for 
                        the taxable year which is a farming 
                        loss with respect to the taxpayer, such 
                        loss shall be a net operating loss 
                        carryback to each of the 2 taxable 
                        years preceding the taxable year of 
                        such loss.
                            ``(ii) Farming loss.--For purposes 
                        of this section, the term `farming 
                        loss' means the lesser of--
                                    ``(I) the amount which 
                                would be the net operating loss 
                                for the taxable year if only 
                                income and deductions 
                                attributable to farming 
                                businesses (as defined in 
                                section 263A(e)(4)) are taken 
                                into account, or
                                    ``(II) the amount of the 
                                net operating loss for such 
                                taxable year.
                            ``(iii) Coordination with paragraph 
                        (2).--For purposes of applying 
                        paragraph (2), a farming loss for any 
                        taxable year shall be treated as a 
                        separate net operating loss for such 
                        taxable year to be taken into account 
                        after the remaining portion of the net 
                        operating loss for such taxable year.
                            ``(iv) Election.--Any taxpayer 
                        entitled to a 2-year carryback under 
                        clause (i) from any loss year may elect 
                        not to have such clause apply to such 
                        loss year. Such election shall be made 
                        in such manner as prescribed by the 
                        Secretary and shall be made by the due 
                        date (including extensions of time) for 
                        filing the taxpayer's return for the 
                        taxable year of the net operating loss. 
                        Such election, once made for any 
                        taxable year, shall be irrevocable for 
                        such taxable year.''.
            (2) Conforming amendments.--
                    (A) Section 172 is amended by striking 
                subsections (f), (g), and (h), and by 
                redesignating subsection (i) as subsection (f).
                    (B) Section 537(b)(4) is amended by 
                inserting ``(as in effect before the date of 
                enactment of the Tax Cuts and Jobs Act)'' after 
                ``as defined in section 172(f)''.
    (d) Treatment of Certain Insurance Losses.--
            (1) Treatment of carryforwards and carrybacks.--
        Section 172(b)(1), as amended by subsections (b)(2) and 
        (c)(1), is amended by adding at the end the following 
        new subparagraph:
                    ``(C) Insurance companies.--In the case of 
                an insurance company (as defined in section 
                816(a)) other than a life insurance company, 
                the net operating loss for any taxable year--
                            ``(i) shall be a net operating loss 
                        carryback to each of the 2 taxable 
                        years preceding the taxable year of 
                        such loss, and
                            ``(ii) shall be a net operating 
                        loss carryover to each of the 20 
                        taxable years following the taxable 
                        year of the loss.''.
            (2) Exemption from limitation.--Section 172, as 
        amended by subsection (c)(2)(A), is amended by 
        redesignating subsection (f) as subsection (g) and 
        inserting after subsection (e) the following new 
        subsection:
    ``(f) Special Rule for Insurance Companies.--In the case of 
an insurance company (as defined in section 816(a)) other than 
a life insurance company--
            ``(1) the amount of the deduction allowed under 
        subsection (a) shall be the aggregate of the net 
        operating loss carryovers to such year, plus the net 
        operating loss carrybacks to such year, and
            ``(2) subparagraph (C) of subsection (b)(2) shall 
        not apply.''.
    (e) Effective Date.--
            (1) Net operating loss limitation.--The amendments 
        made by subsections (a) and (d)(2) shall apply to 
        losses arising in taxable years beginning after 
        December 31, 2017.
            (2) Carryforwards and carrybacks.--The amendments 
        made by subsections (b), (c), and (d)(1) shall apply to 
        net operating losses arising in taxable years ending 
        after December 31, 2017.

SEC. 13303. LIKE-KIND EXCHANGES OF REAL PROPERTY.

    (a) In General.--Section 1031(a)(1) is amended by striking 
``property'' each place it appears and inserting ``real 
property''.
    (b) Conforming Amendments.--
            (1)(A) Paragraph (2) of section 1031(a) is amended 
        to read as follows:
            ``(2) Exception for real property held for sale.--
        This subsection shall not apply to any exchange of real 
        property held primarily for sale.''.
            (B) Section 1031 is amended by striking subsection 
        (i).
            (2) Section 1031 is amended by striking subsection 
        (e).
            (3) Section 1031, as amended by paragraph (2), is 
        amended by inserting after subsection (d) the following 
        new subsection:
    ``(e) Application to Certain Partnerships.--For purposes of 
this section, an interest in a partnership which has in effect 
a valid election under section 761(a) to be excluded from the 
application of all of subchapter K shall be treated as an 
interest in each of the assets of such partnership and not as 
an interest in a partnership.''.
            (4) Section 1031(h) is amended to read as follows:
    ``(h) Special Rules for Foreign Real Property.--Real 
property located in the United States and real property located 
outside the United States are not property of a like kind.''.
            (5) The heading of section 1031 is amended by 
        striking ``property'' and inserting ``real property''.
            (6) The table of sections for part III of 
        subchapter O of chapter 1 is amended by striking the 
        item relating to section 1031 and inserting the 
        following new item:

``Sec. 1031. Exchange of real property held for productive use or 
          investment.''.

    (c) Effective Date.--
            (1) In general.--Except as otherwise provided in 
        this subsection, the amendments made by this section 
        shall apply to exchanges completed after December 31, 
        2017.
            (2) Transition rule.--The amendments made by this 
        section shall not apply to any exchange if--
                    (A) the property disposed of by the 
                taxpayer in the exchange is disposed of on or 
                before December 31 2017, or
                    (B) the property received by the taxpayer 
                in the exchange is received on or before 
                December 31, 2017.

SEC. 13304. LIMITATION ON DEDUCTION BY EMPLOYERS OF EXPENSES FOR FRINGE 
                    BENEFITS.

    (a) No Deduction Allowed for Entertainment Expenses.--
            (1) In general.--Section 274(a) is amended--
                    (A) in paragraph (1)(A), by striking 
                ``unless'' and all that follows through ``trade 
                or business,'',
                    (B) by striking the flush sentence at the 
                end of paragraph (1), and
                    (C) by striking paragraph (2)(C).
            (2) Conforming amendments.--
                    (A) Section 274(d) is amended--
                            (i) by striking paragraph (2) and 
                        redesignating paragraphs (3) and (4) as 
                        paragraphs (2) and (3), respectively, 
                        and
                            (ii) in the flush text following 
                        paragraph (3) (as so redesignated)--
                                    (I) by striking ``, 
                                entertainment, amusement, 
                                recreation, or use of the 
                                facility or property,'' in item 
                                (B), and
                                    (II) by striking ``(D) the 
                                business relationship to the 
                                taxpayer of persons 
                                entertained, using the facility 
                                or property, or receiving the 
                                gift'' and inserting ``(D) the 
                                business relationship to the 
                                taxpayer of the person 
                                receiving the benefit'',
                    (B) Section 274 is amended by striking 
                subsection (l).
                    (C) Section 274(n) is amended by striking 
                ``and Entertainment'' in the heading.
                    (D) Section 274(n)(1) is amended to read as 
                follows:
            ``(1) In general.--The amount allowable as a 
        deduction under this chapter for any expense for food 
        or beverages shall not exceed 50 percent of the amount 
        of such expense which would (but for this paragraph) be 
        allowable as a deduction under this chapter.''.
                    (E) Section 274(n)(2) is amended--
                            (i) in subparagraph (B), by 
                        striking ``in the case of an expense 
                        for food or beverages,'',
                            (ii) by striking subparagraph (C) 
                        and redesignating subparagraphs (D) and 
                        (E) as subparagraphs (C) and (D), 
                        respectively,
                            (iii) by striking ``of subparagraph 
                        (E)'' the last sentence and inserting 
                        ``of subparagraph (D)'', and
                            (iv) by striking ``in subparagraph 
                        (D)'' in the last sentence and 
                        inserting ``in subparagraph (C)''.
                    (F) Clause (iv) of section 7701(b)(5)(A) is 
                amended to read as follows:
                            ``(iv) a professional athlete who 
                        is temporarily in the United States to 
                        compete in a sports event--
                                    ``(I) which is organized 
                                for the primary purpose of 
                                benefiting an organization 
                                which is described in section 
                                501(c)(3) and exempt from tax 
                                under section 501(a),
                                    ``(II) all of the net 
                                proceeds of which are 
                                contributed to such 
                                organization, and,
                                    ``(III) which utilizes 
                                volunteers for substantially 
                                all of the work performed in 
                                carrying out such event.''.
    (b) Only 50 Percent of Expenses for Meals Provided on or 
Near Business Premises Allowed as Deduction.--Paragraph (2) of 
section 274(n), as amended by subsection (a), is amended--
            (1) by striking subparagraph (B),
            (2) by redesignating subparagraphs (C) and (D) as 
        subparagraphs (B) and (C), respectively,
            (3) by striking ``of subparagraph (D)'' in the last 
        sentence and inserting ``of subparagraph (C)'', and
            (4) by striking ``in subparagraph (C)'' in the last 
        sentence and inserting ``in subparagraph (B)''.
    (c) Treatment of Transportation Benefits.--Section 274, as 
amended by subsection (a), is amended--
            (1) in subsection (a)--
                    (A) in the heading, by striking ``or 
                Recreation'' and inserting ``Recreation, or 
                Qualified Transportation Fringes'', and
                    (B) by adding at the end the following new 
                paragraph:
            ``(4) Qualified transportation fringes.--No 
        deduction shall be allowed under this chapter for the 
        expense of any qualified transportation fringe (as 
        defined in section 132(f)) provided to an employee of 
        the taxpayer.'', and
            (2) by inserting after subsection (k) the following 
        new subsection:
    ``(l) Transportation and Commuting Benefits.--
            ``(1) In general.--No deduction shall be allowed 
        under this chapter for any expense incurred for 
        providing any transportation, or any payment or 
        reimbursement, to an employee of the taxpayer in 
        connection with travel between the employee's residence 
        and place of employment, except as necessary for 
        ensuring the safety of the employee.
            ``(2) Exception.--In the case of any qualified 
        bicycle commuting reimbursement (as described in 
        section 132(f)(5)(F)), this subsection shall not apply 
        for any amounts paid or incurred after December 31, 
        2017, and before January 1, 2026.''.
    (d) Elimination of Deduction for Meals Provided at 
Convenience of Employer.--Section 274, as amended by subsection 
(c), is amended--
            (1) by redesignating subsection (o) as subsection 
        (p), and
            (2) by inserting after subsection (n) the following 
        new subsection:
    ``(o) Meals Provided at Convenience of Employer.--No 
deduction shall be allowed under this chapter for--
            ``(1) any expense for the operation of a facility 
        described in section 132(e)(2), and any expense for 
        food or beverages, including under section 132(e)(1), 
        associated with such facility, or
            ``(2) any expense for meals described in section 
        119(a).''.
    (e) Effective Date.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        amounts incurred or paid after December 31, 2017.
            (2) Effective date for elimination of deduction for 
        meals provided at convenience of employer.--The 
        amendments made by subsection (d) shall apply to 
        amounts incurred or paid after December 31, 2025.

SEC. 13305. REPEAL OF DEDUCTION FOR INCOME ATTRIBUTABLE TO DOMESTIC 
                    PRODUCTION ACTIVITIES.

    (a) In General.--Part VI of subchapter B of chapter 1 is 
amended by striking section 199 (and by striking the item 
relating to such section in the table of sections for such 
part).
    (b) Conforming Amendments.--
            (1) Sections 74(d)(2)(B), 86(b)(2)(A), 
        135(c)(4)(A), 137(b)(3)(A), 219(g)(3)(A)(ii), 
        221(b)(2)(C), 222(b)(2)(C), 246(b)(1), and 
        469(i)(3)(F)(iii) are each amended by striking 
        ``199,''.
            (2) Section 170(b)(2)(D), as amended by subtitle A, 
        is amended by striking clause (iv), and by 
        redesignating clauses (v) and (vi) as clauses (iv) and 
        (v).
            (3) Section 172(d) is amended by striking paragraph 
        (7).
            (4) Section 613(a), as amended by section 11011, is 
        amended by striking ``and without the deduction under 
        section 199''.
            (5) Section 613A(d)(1), as amended by section 
        11011, is amended by striking subparagraph (B) and by 
        redesignating subparagraphs (C), (D), (E), and (F) as 
        subparagraphs (B), (C), (D), and (E), respectively.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13306. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, AND OTHER 
                    AMOUNTS.

    (a) Denial of Deduction.--
            (1) In general.--Subsection (f) of section 162 is 
        amended to read as follows:
    ``(f) Fines, Penalties, and Other Amounts.--
            ``(1) In general.--Except as provided in the 
        following paragraphs of this subsection, no deduction 
        otherwise allowable shall be allowed under this chapter 
        for any amount paid or incurred (whether by suit, 
        agreement, or otherwise) to, or at the direction of, a 
        government or governmental entity in relation to the 
        violation of any law or the investigation or inquiry by 
        such government or entity into the potential violation 
        of any law.
            ``(2) Exception for amounts constituting 
        restitution or paid to come into compliance with law.--
                    ``(A) In general.--Paragraph (1) shall not 
                apply to any amount that--
                            ``(i) the taxpayer establishes--
                                    ``(I) constitutes 
                                restitution (including 
                                remediation of property) for 
                                damage or harm which was or may 
                                be caused by the violation of 
                                any law or the potential 
                                violation of any law, or
                                    ``(II) is paid to come into 
                                compliance with any law which 
                                was violated or otherwise 
                                involved in the investigation 
                                or inquiry described in 
                                paragraph (1),
                            ``(ii) is identified as restitution 
                        or as an amount paid to come into 
                        compliance with such law, as the case 
                        may be, in the court order or 
                        settlement agreement, and
                            ``(iii) in the case of any amount 
                        of restitution for failure to pay any 
                        tax imposed under this title in the 
                        same manner as if such amount were such 
                        tax, would have been allowed as a 
                        deduction under this chapter if it had 
                        been timely paid.
                The identification under clause (ii) alone 
                shall not be sufficient to make the 
                establishment required under clause (i).
                    ``(B) Limitation.--Subparagraph (A) shall 
                not apply to any amount paid or incurred as 
                reimbursement to the government or entity for 
                the costs of any investigation or litigation.
            ``(3) Exception for amounts paid or incurred as the 
        result of certain court orders.--Paragraph (1) shall 
        not apply to any amount paid or incurred by reason of 
        any order of a court in a suit in which no government 
        or governmental entity is a party.
            ``(4) Exception for taxes due.--Paragraph (1) shall 
        not apply to any amount paid or incurred as taxes due.
            ``(5) Treatment of certain nongovernmental 
        regulatory entities.--For purposes of this subsection, 
        the following nongovernmental entities shall be treated 
        as governmental entities:
                    ``(A) Any nongovernmental entity which 
                exercises self-regulatory powers (including 
                imposing sanctions) in connection with a 
                qualified board or exchange (as defined in 
                section 1256(g)(7)).
                    ``(B) To the extent provided in 
                regulations, any nongovernmental entity which 
                exercises self-regulatory powers (including 
                imposing sanctions) as part of performing an 
                essential governmental function.''.
            (2) Effective date.--The amendment made by this 
        subsection shall apply to amounts paid or incurred on 
        or after the date of the enactment of this Act, except 
        that such amendments shall not apply to amounts paid or 
        incurred under any binding order or agreement entered 
        into before such date. Such exception shall not apply 
        to an order or agreement requiring court approval 
        unless the approval was obtained before such date.
    (b) Reporting of Deductible Amounts.--
            (1) In general.--Subpart B of part III of 
        subchapter A of chapter 61 is amended by inserting 
        after section 6050W the following new section:

``SEC. 6050X. INFORMATION WITH RESPECT TO CERTAIN FINES, PENALTIES, AND 
                    OTHER AMOUNTS.

    ``(a) Requirement of Reporting.--
            ``(1) In general.--The appropriate official of any 
        government or any entity described in section 162(f)(5) 
        which is involved in a suit or agreement described in 
        paragraph (2) shall make a return in such form as 
        determined by the Secretary setting forth--
                    ``(A) the amount required to be paid as a 
                result of the suit or agreement to which 
                paragraph (1) of section 162(f) applies,
                    ``(B) any amount required to be paid as a 
                result of the suit or agreement which 
                constitutes restitution or remediation of 
                property, and
                    ``(C) any amount required to be paid as a 
                result of the suit or agreement for the purpose 
                of coming into compliance with any law which 
                was violated or involved in the investigation 
                or inquiry.
            ``(2) Suit or agreement described.--
                    ``(A) In general.--A suit or agreement is 
                described in this paragraph if--
                            ``(i) it is--
                                    ``(I) a suit with respect 
                                to a violation of any law over 
                                which the government or entity 
                                has authority and with respect 
                                to which there has been a court 
                                order, or
                                    ``(II) an agreement which 
                                is entered into with respect to 
                                a violation of any law over 
                                which the government or entity 
                                has authority, or with respect 
                                to an investigation or inquiry 
                                by the government or entity 
                                into the potential violation of 
                                any law over which such 
                                government or entity has 
                                authority, and
                            ``(ii) the aggregate amount 
                        involved in all court orders and 
                        agreements with respect to the 
                        violation, investigation, or inquiry is 
                        $600 or more.
                    ``(B) Adjustment of reporting threshold.--
                The Secretary shall adjust the $600 amount in 
                subparagraph (A)(ii) as necessary in order to 
                ensure the efficient administration of the 
                internal revenue laws.
            ``(3) Time of filing.--The return required under 
        this subsection shall be filed at the time the 
        agreement is entered into, as determined by the 
        Secretary.
    ``(b) Statements to Be Furnished to Individuals Involved in 
the Settlement.--Every person required to make a return under 
subsection (a) shall furnish to each person who is a party to 
the suit or agreement a written statement showing--
            ``(1) the name of the government or entity, and
            ``(2) the information supplied to the Secretary 
        under subsection (a)(1).
The written statement required under the preceding sentence 
shall be furnished to the person at the same time the 
government or entity provides the Secretary with the 
information required under subsection (a).
    ``(c) Appropriate Official Defined.--For purposes of this 
section, the term `appropriate official' means the officer or 
employee having control of the suit, investigation, or inquiry 
or the person appropriately designated for purposes of this 
section.''.
            (2) Conforming amendment.--The table of sections 
        for subpart B of part III of subchapter A of chapter 61 
        is amended by inserting after the item relating to 
        section 6050W the following new item:

``Sec. 6050X. Information with respect to certain fines, penalties, and 
          other amounts.''.

            (3) Effective date.--The amendments made by this 
        subsection shall apply to amounts paid or incurred on 
        or after the date of the enactment of this Act, except 
        that such amendments shall not apply to amounts paid or 
        incurred under any binding order or agreement entered 
        into before such date. Such exception shall not apply 
        to an order or agreement requiring court approval 
        unless the approval was obtained before such date.

SEC. 13307. DENIAL OF DEDUCTION FOR SETTLEMENTS SUBJECT TO 
                    NONDISCLOSURE AGREEMENTS PAID IN CONNECTION WITH 
                    SEXUAL HARASSMENT OR SEXUAL ABUSE.

    (a) Denial of Deduction.--Section 162 is amended by 
redesignating subsection (q) as subsection (r) and by inserting 
after subsection (p) the following new subsection:
    ``(q) Payments Related to Sexual Harassment and Sexual 
Abuse.--No deduction shall be allowed under this chapter for--
            ``(1) any settlement or payment related to sexual 
        harassment or sexual abuse if such settlement or 
        payment is subject to a nondisclosure agreement, or
            ``(2) attorney's fees related to such a settlement 
        or payment.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to amounts paid or incurred after the date of the 
enactment of this Act.

SEC. 13308. REPEAL OF DEDUCTION FOR LOCAL LOBBYING EXPENSES.

    (a) In General.--Section 162(e) is amended by striking 
paragraphs (2) and (7) and by redesignating paragraphs (3), 
(4), (5), (6), and (8) as paragraphs (2), (3), (4), (5), and 
(6), respectively.
    (b) Conforming Amendment.--Section 6033(e)(1)(B)(ii) is 
amended by striking ``section 162(e)(5)(B)(ii)'' and inserting 
``section 162(e)(4)(B)(ii)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to amounts paid or incurred on or after the date of 
the enactment of this Act.

SEC. 13309. RECHARACTERIZATION OF CERTAIN GAINS IN THE CASE OF 
                    PARTNERSHIP PROFITS INTERESTS HELD IN CONNECTION 
                    WITH PERFORMANCE OF INVESTMENT SERVICES.

    (a) In General.--Part IV of subchapter O of chapter 1 is 
amended--
            (1) by redesignating section 1061 as section 1062, 
        and
            (2) by inserting after section 1060 the following 
        new section:

``SEC. 1061. PARTNERSHIP INTERESTS HELD IN CONNECTION WITH PERFORMANCE 
                    OF SERVICES.

    ``(a) In General.--If one or more applicable partnership 
interests are held by a taxpayer at any time during the taxable 
year, the excess (if any) of--
            ``(1) the taxpayer's net long-term capital gain 
        with respect to such interests for such taxable year, 
        over
            ``(2) the taxpayer's net long-term capital gain 
        with respect to such interests for such taxable year 
        computed by applying paragraphs (3) and (4) of sections 
        1222 by substituting `3 years' for `1 year',
shall be treated as short-term capital gain, notwithstanding 
section 83 or any election in effect under section 83(b).
    ``(b) Special Rule.--To the extent provided by the 
Secretary, subsection (a) shall not apply to income or gain 
attributable to any asset not held for portfolio investment on 
behalf of third party investors.
    ``(c) Applicable Partnership Interest.--For purposes of 
this section--
            ``(1) In general.--Except as provided in this 
        paragraph or paragraph (4), the term `applicable 
        partnership interest' means any interest in a 
        partnership which, directly or indirectly, is 
        transferred to (or is held by) the taxpayer in 
        connection with the performance of substantial services 
        by the taxpayer, or any other related person, in any 
        applicable trade or business. The previous sentence 
        shall not apply to an interest held by a person who is 
        employed by another entity that is conducting a trade 
        or business (other than an applicable trade or 
        business) and only provides services to such other 
        entity.
            ``(2) Applicable trade or business.--The term 
        `applicable trade or business' means any activity 
        conducted on a regular, continuous, and substantial 
        basis which, regardless of whether the activity is 
        conducted in one or more entities, consists, in whole 
        or in part, of--
                    ``(A) raising or returning capital, and
                    ``(B) either--
                            ``(i) investing in (or disposing 
                        of) specified assets (or identifying 
                        specified assets for such investing or 
                        disposition), or
                            ``(ii) developing specified assets.
            ``(3) Specified asset.--The term `specified asset' 
        means securities (as defined in section 475(c)(2) 
        without regard to the last sentence thereof), 
        commodities (as defined in section 475(e)(2)), real 
        estate held for rental or investment, cash or cash 
        equivalents, options or derivative contracts with 
        respect to any of the foregoing, and an interest in a 
        partnership to the extent of the partnership's 
        proportionate interest in any of the foregoing.
            ``(4) Exceptions.--The term `applicable partnership 
        interest' shall not include--
                    ``(A) any interest in a partnership 
                directly or indirectly held by a corporation, 
                or
                    ``(B) any capital interest in the 
                partnership which provides the taxpayer with a 
                right to share in partnership capital 
                commensurate with--
                            ``(i) the amount of capital 
                        contributed (determined at the time of 
                        receipt of such partnership interest), 
                        or
                            ``(ii) the value of such interest 
                        subject to tax under section 83 upon 
                        the receipt or vesting of such 
                        interest.
            ``(5) Third party investor.--The term `third party 
        investor' means a person who--
                    ``(A) holds an interest in the partnership 
                which does not constitute property held in 
                connection with an applicable trade or 
                business; and
                    ``(B) is not (and has not been) actively 
                engaged, and is (and was) not related to a 
                person so engaged, in (directly or indirectly) 
                providing substantial services described in 
                paragraph (1) for such partnership or any 
                applicable trade or business.
    ``(d) Transfer of Applicable Partnership Interest to 
Related Person.--
            ``(1) In general.--If a taxpayer transfers any 
        applicable partnership interest, directly or 
        indirectly, to a person related to the taxpayer, the 
        taxpayer shall include in gross income (as short term 
        capital gain) the excess (if any) of--
                    ``(A) so much of the taxpayer's long-term 
                capital gains with respect to such interest for 
                such taxable year attributable to the sale or 
                exchange of any asset held for not more than 3 
                years as is allocable to such interest, over
                    ``(B) any amount treated as short term 
                capital gain under subsection (a) with respect 
                to the transfer of such interest.
            ``(2) Related person.--For purposes of this 
        paragraph, a person is related to the taxpayer if--
                    ``(A) the person is a member of the 
                taxpayer's family within the meaning of section 
                318(a)(1), or
                    ``(B) the person performed a service within 
                the current calendar year or the preceding 
                three calendar years in any applicable trade or 
                business in which or for which the taxpayer 
                performed a service.
    ``(e) Reporting.--The Secretary shall require such 
reporting (at the time and in the manner prescribed by the 
Secretary) as is necessary to carry out the purposes of this 
section.
    ``(f) Regulations.--The Secretary shall issue such 
regulations or other guidance as is necessary or appropriate to 
carry out the purposes of this section''.
    (b) Clerical Amendment.--The table of sections for part IV 
of subchapter O of chapter 1 is amended by striking the item 
relating to 1061 and inserting the following new items:

``Sec. 1061. Partnership interests held in connection with performance 
          of services.
``Sec. 1062. Cross references.''.

    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13310. PROHIBITION ON CASH, GIFT CARDS, AND OTHER NON-TANGIBLE 
                    PERSONAL PROPERTY AS EMPLOYEE ACHIEVEMENT AWARDS.

    (a) In General.--Subparagraph (A) of section 274(j)(3) is 
amended--
            (1) by striking ``The term'' and inserting the 
        following:
                            ``(i) In general.--The term''.
            (2) by redesignating clauses (i), (ii), and (iii) 
        as subclauses (I), (II), and (III), respectively, and 
        conforming the margins accordingly, and
            (3) by adding at the end the following new clause:
                            ``(ii) Tangible personal 
                        property.--For purposes of clause (i), 
                        the term `tangible personal property' 
                        shall not include--
                                    ``(I) cash, cash 
                                equivalents, gift cards, gift 
                                coupons, or gift certificates 
                                (other than arrangements 
                                conferring only the right to 
                                select and receive tangible 
                                personal property from a 
                                limited array of such items 
                                pre-selected or pre-approved by 
                                the employer), or
                                    ``(II) vacations, meals, 
                                lodging, tickets to theater or 
                                sporting events, stocks, bonds, 
                                other securities, and other 
                                similar items.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to amounts paid or incurred after December 31, 
2017.

SEC. 13311. ELIMINATION OF DEDUCTION FOR LIVING EXPENSES INCURRED BY 
                    MEMBERS OF CONGRESS.

    (a) In General.--Subsection (a) of section 162 is amended 
in the matter following paragraph (3) by striking ``in excess 
of $3,000''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 13312. CERTAIN CONTRIBUTIONS BY GOVERNMENTAL ENTITIES NOT TREATED 
                    AS CONTRIBUTIONS TO CAPITAL.

    (a) In General.--Section 118 is amended--
            (1) by striking subsections (b), (c), and (d),
            (2) by redesignating subsection (e) as subsection 
        (d), and
            (3) by inserting after subsection (a) the following 
        new subsections:
    ``(b) Exceptions.--For purposes of subsection (a), the term 
`contribution to the capital of the taxpayer' does not 
include--
            ``(1) any contribution in aid of construction or 
        any other contribution as a customer or potential 
        customer, and
            ``(2) any contribution by any governmental entity 
        or civic group (other than a contribution made by a 
        shareholder as such).
    ``(c) Regulations.--The Secretary shall issue such 
regulations or other guidance as may be necessary or 
appropriate to carry out this section, including regulations or 
other guidance for determining whether any contribution 
constitutes a contribution in aid of construction.''.
    (b) Effective Date.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        contributions made after the date of enactment of this 
        Act.
            (2) Exception.--The amendments made by this section 
        shall not apply to any contribution, made after the 
        date of enactment of this Act by a governmental entity, 
        which is made pursuant to a master development plan 
        that has been approved prior to such date by a 
        governmental entity.

SEC. 13313. REPEAL OF ROLLOVER OF PUBLICLY TRADED SECURITIES GAIN INTO 
                    SPECIALIZED SMALL BUSINESS INVESTMENT COMPANIES.

    (a) In General.--Part III of subchapter O of chapter 1 is 
amended by striking section 1044 (and by striking the item 
relating to such section in the table of sections of such 
part).
    (b) Conforming Amendments.--Section 1016(a)(23) is 
amended--
            (1) by striking ``1044,'', and
            (2) by striking ``1044(d),''.
    (c) Effective Date.--The amendments made by this section 
shall apply to sales after December 31, 2017.

SEC. 13314. CERTAIN SELF-CREATED PROPERTY NOT TREATED AS A CAPITAL 
                    ASSET.

    (a) Patents, etc.--Section 1221(a)(3) is amended by 
inserting ``a patent, invention, model or design (whether or 
not patented), a secret formula or process,'' before ``a 
copyright''.
    (b) Conforming Amendment.--Section 1231(b)(1)(C) is amended 
by inserting ``a patent, invention, model or design (whether or 
not patented), a secret formula or process,'' before ``a 
copyright''.
    (c) Effective Date.--The amendments made by this section 
shall apply to dispositions after December 31, 2017.

                        PART V--BUSINESS CREDITS

SEC. 13401. MODIFICATION OF ORPHAN DRUG CREDIT.

    (a) Credit Rate.--Subsection (a) of section 45C is amended 
by striking ``50 percent'' and inserting ``25 percent''.
    (b) Election of Reduced Credit.--Subsection (b) of section 
280C is amended by redesignating paragraph (3) as paragraph (4) 
and by inserting after paragraph (2) the following new 
paragraph:
            ``(3) Election of reduced credit.--
                    ``(A) In general.--In the case of any 
                taxable year for which an election is made 
                under this paragraph--
                            ``(i) paragraphs (1) and (2) shall 
                        not apply, and
                            ``(ii) the amount of the credit 
                        under section 45C(a) shall be the 
                        amount determined under subparagraph 
                        (B).
                    ``(B) Amount of reduced credit.--The amount 
                of credit determined under this subparagraph 
                for any taxable year shall be the amount equal 
                to the excess of--
                            ``(i) the amount of credit 
                        determined under section 45C(a) without 
                        regard to this paragraph, over
                            ``(ii) the product of--
                                    ``(I) the amount described 
                                in clause (i), and
                                    ``(II) the maximum rate of 
                                tax under section 11(b).
                    ``(C) Election.--An election under this 
                paragraph for any taxable year shall be made 
                not later than the time for filing the return 
                of tax for such year (including extensions), 
                shall be made on such return, and shall be made 
                in such manner as the Secretary shall 
                prescribe. Such an election, once made, shall 
                be irrevocable.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13402. REHABILITATION CREDIT LIMITED TO CERTIFIED HISTORIC 
                    STRUCTURES.

    (a) In General.--Subsection (a) of section 47 is amended to 
read as follows:
    ``(a) General Rule.--
            ``(1) In general.--For purposes of section 46, for 
        any taxable year during the 5-year period beginning in 
        the taxable year in which a qualified rehabilitated 
        building is placed in service, the rehabilitation 
        credit for such year is an amount equal to the ratable 
        share for such year.
            ``(2) Ratable share.--For purposes of paragraph 
        (1), the ratable share for any taxable year during the 
        period described in such paragraph is the amount equal 
        to 20 percent of the qualified rehabilitation 
        expenditures with respect to the qualified 
        rehabilitated building, as allocated ratably to each 
        year during such period.''.
    (b) Conforming Amendments.--
            (1) Section 47(c) is amended--
                    (A) in paragraph (1)--
                            (i) in subparagraph (A), by 
                        amending clause (iii) to read as 
                        follows:
                            ``(iii) such building is a 
                        certified historic structure, and'',
                            (ii) by striking subparagraph (B), 
                        and
                            (iii) by redesignating 
                        subparagraphs (C) and (D) as 
                        subparagraphs (B) and (C), 
                        respectively, and
                    (B) in paragraph (2)(B), by amending clause 
                (iv) to read as follows:
                            ``(iv) Certified historic 
                        structure.--Any expenditure 
                        attributable to the rehabilitation of a 
                        qualified rehabilitated building unless 
                        the rehabilitation is a certified 
                        rehabilitation (within the meaning of 
                        subparagraph (C)).''.
            (2) Paragraph (4) of section 145(d) is amended--
                    (A) by striking ``of section 47(c)(1)(C)'' 
                each place it appears and inserting ``of 
                section 47(c)(1)(B)'', and
                    (B) by striking ``section 47(c)(1)(C)(i)'' 
                and inserting ``section 47(c)(1)(B)(i)''.
    (c) Effective Date.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        amounts paid or incurred after December 31, 2017.
            (2) Transition rule.--In the case of qualified 
        rehabilitation expenditures with respect to any 
        building--
                    (A) owned or leased by the taxpayer during 
                the entirety of the period after December 31, 
                2017, and
                    (B) with respect to which the 24-month 
                period selected by the taxpayer under clause 
                (i) of section 47(c)(1)(B) of the Internal 
                Revenue Code (as amended by subsection (b)), or 
                the 60-month period applicable under clause 
                (ii) of such section, begins not later than 180 
                days after the date of the enactment of this 
                Act,
        the amendments made by this section shall apply to such 
        expenditures paid or incurred after the end of the 
        taxable year in which the 24-month period, or the 60-
        month period, referred to in subparagraph (B) ends.

SEC. 13403. EMPLOYER CREDIT FOR PAID FAMILY AND MEDICAL LEAVE.

    (a) In General.--
            (1) Allowance of credit.--Subpart D of part IV of 
        subchapter A of chapter 1 is amended by adding at the 
        end the following new section:

``SEC. 45S. EMPLOYER CREDIT FOR PAID FAMILY AND MEDICAL LEAVE.

    ``(a) Establishment of Credit.--
            ``(1) In general.--For purposes of section 38, in 
        the case of an eligible employer, the paid family and 
        medical leave credit is an amount equal to the 
        applicable percentage of the amount of wages paid to 
        qualifying employees during any period in which such 
        employees are on family and medical leave.
            ``(2) Applicable percentage.--For purposes of 
        paragraph (1), the term `applicable percentage' means 
        12.5 percent increased (but not above 25 percent) by 
        0.25 percentage points for each percentage point by 
        which the rate of payment (as described under 
        subsection (c)(1)(B)) exceeds 50 percent.
    ``(b) Limitation.--
            ``(1) In general.--The credit allowed under 
        subsection (a) with respect to any employee for any 
        taxable year shall not exceed an amount equal to the 
        product of the normal hourly wage rate of such employee 
        for each hour (or fraction thereof) of actual services 
        performed for the employer and the number of hours (or 
        fraction thereof) for which family and medical leave is 
        taken.
            ``(2) Non-hourly wage rate.--For purposes of 
        paragraph (1), in the case of any employee who is not 
        paid on an hourly wage rate, the wages of such employee 
        shall be prorated to an hourly wage rate under 
        regulations established by the Secretary.
            ``(3) Maximum amount of leave subject to credit.--
        The amount of family and medical leave that may be 
        taken into account with respect to any employee under 
        subsection (a) for any taxable year shall not exceed 12 
        weeks.
    ``(c) Eligible Employer.--For purposes of this section--
            ``(1) In general.--The term `eligible employer' 
        means any employer who has in place a written policy 
        that meets the following requirements:
                    ``(A) The policy provides--
                            ``(i) in the case of a qualifying 
                        employee who is not a part-time 
                        employee (as defined in section 
                        4980E(d)(4)(B)), not less than 2 weeks 
                        of annual paid family and medical 
                        leave, and
                            ``(ii) in the case of a qualifying 
                        employee who is a part-time employee, 
                        an amount of annual paid family and 
                        medical leave that is not less than an 
                        amount which bears the same ratio to 
                        the amount of annual paid family and 
                        medical leave that is provided to a 
                        qualifying employee described in clause 
                        (i) as--
                                    ``(I) the number of hours 
                                the employee is expected to 
                                work during any week, bears to
                                    ``(II) the number of hours 
                                an equivalent qualifying 
                                employee described in clause 
                                (i) is expected to work during 
                                the week.
                    ``(B) The policy requires that the rate of 
                payment under the program is not less than 50 
                percent of the wages normally paid to such 
                employee for services performed for the 
                employer.
            ``(2) Special rule for certain employers.--
                    ``(A) In general.--An added employer shall 
                not be treated as an eligible employer unless 
                such employer provides paid family and medical 
                leave in compliance with a written policy which 
                ensures that the employer--
                            ``(i) will not interfere with, 
                        restrain, or deny the exercise of or 
                        the attempt to exercise, any right 
                        provided under the policy, and
                            ``(ii) will not discharge or in any 
                        other manner discriminate against any 
                        individual for opposing any practice 
                        prohibited by the policy.
                    ``(B) Added employer; added employee.--For 
                purposes of this paragraph--
                            ``(i) Added employee.--The term 
                        `added employee' means a qualifying 
                        employee who is not covered by title I 
                        of the Family and Medical Leave Act of 
                        1993, as amended.
                            ``(ii) Added employer.--The term 
                        `added employer' means an eligible 
                        employer (determined without regard to 
                        this paragraph), whether or not covered 
                        by that title I, who offers paid family 
                        and medical leave to added employees.
            ``(3) Aggregation rule.--All persons which are 
        treated as a single employer under subsections (a) and 
        (b) of section 52 shall be treated as a single 
        taxpayer.
            ``(4) Treatment of benefits mandated or paid for by 
        state or local governments.--For purposes of this 
        section, any leave which is paid by a State or local 
        government or required by State or local law shall not 
        be taken into account in determining the amount of paid 
        family and medical leave provided by the employer.
            ``(5) No inference.--Nothing in this subsection 
        shall be construed as subjecting an employer to any 
        penalty, liability, or other consequence (other than 
        ineligibility for the credit allowed by reason of 
        subsection (a) or recapturing the benefit of such 
        credit) for failure to comply with the requirements of 
        this subsection.
    ``(d) Qualifying Employees.--For purposes of this section, 
the term `qualifying employee' means any employee (as defined 
in section 3(e) of the Fair Labor Standards Act of 1938, as 
amended) who--
            ``(1) has been employed by the employer for 1 year 
        or more, and
            ``(2) for the preceding year, had compensation not 
        in excess of an amount equal to 60 percent of the 
        amount applicable for such year under clause (i) of 
        section 414(q)(1)(B).
    ``(e) Family and Medical Leave.--
            ``(1) In general.--Except as provided in paragraph 
        (2), for purposes of this section, the term `family and 
        medical leave' means leave for any 1 or more of the 
        purposes described under subparagraph (A), (B), (C), 
        (D), or (E) of paragraph (1), or paragraph (3), of 
        section 102(a) of the Family and Medical Leave Act of 
        1993, as amended, whether the leave is provided under 
        that Act or by a policy of the employer.
            ``(2) Exclusion.--If an employer provides paid 
        leave as vacation leave, personal leave, or medical or 
        sick leave (other than leave specifically for 1 or more 
        of the purposes referred to in paragraph (1)), that 
        paid leave shall not be considered to be family and 
        medical leave under paragraph (1).
            ``(3) Definitions.--In this subsection, the terms 
        `vacation leave', `personal leave', and `medical or 
        sick leave' mean those 3 types of leave, within the 
        meaning of section 102(d)(2) of that Act.
    ``(f) Determinations Made by Secretary of Treasury.--For 
purposes of this section, any determination as to whether an 
employer or an employee satisfies the applicable requirements 
for an eligible employer (as described in subsection (c)) or 
qualifying employee (as described in subsection (d)), 
respectively, shall be made by the Secretary based on such 
information, to be provided by the employer, as the Secretary 
determines to be necessary or appropriate.
    ``(g) Wages.--For purposes of this section, the term 
`wages' has the meaning given such term by subsection (b) of 
section 3306 (determined without regard to any dollar 
limitation contained in such section). Such term shall not 
include any amount taken into account for purposes of 
determining any other credit allowed under this subpart.
    ``(h) Election to Have Credit Not Apply.--
            ``(1) In general.--A taxpayer may elect to have 
        this section not apply for any taxable year.
            ``(2) Other rules.--Rules similar to the rules of 
        paragraphs (2) and (3) of section 51(j) shall apply for 
        purposes of this subsection.
    ``(i) Termination.--This section shall not apply to wages 
paid in taxable years beginning after December 31, 2019.''.
    (b) Credit Part of General Business Credit.--Section 38(b) 
is amended by striking ``plus'' at the end of paragraph (35), 
by striking the period at the end of paragraph (36) and 
inserting ``, plus'', and by adding at the end the following 
new paragraph:
            ``(37) in the case of an eligible employer (as 
        defined in section 45S(c)), the paid family and medical 
        leave credit determined under section 45S(a).''.
    (c) Credit Allowed Against AMT.--Subparagraph (B) of 
section 38(c)(4) is amended by redesignating clauses (ix) 
through (xi) as clauses (x) through (xii), respectively, and by 
inserting after clause (viii) the following new clause:
                            ``(ix) the credit determined under 
                        section 45S,''.
    (d) Conforming Amendments.--
            (1) Denial of double benefit.--Section 280C(a) is 
        amended by inserting ``45S(a),'' after ``45P(a),''.
            (2) Election to have credit not apply.--Section 
        6501(m) is amended by inserting ``45S(h),'' after 
        ``45H(g),''.
            (3) Clerical amendment.--The table of sections for 
        subpart D of part IV of subchapter A of chapter 1 is 
        amended by adding at the end the following new item:

``Sec. 45S. Employer credit for paid family and medical leave.''.

    (e) Effective Date.--The amendments made by this section 
shall apply to wages paid in taxable years beginning after 
December 31, 2017.

SEC. 13404. REPEAL OF TAX CREDIT BONDS.

    (a) In General.--Part IV of subchapter A of chapter 1 is 
amended by striking subparts H, I, and J (and by striking the 
items relating to such subparts in the table of subparts for 
such part).
    (b) Payments to Issuers.--Subchapter B of chapter 65 is 
amended by striking section 6431 (and by striking the item 
relating to such section in the table of sections for such 
subchapter).
    (c) Conforming Amendments.--
            (1) Part IV of subchapter U of chapter 1 is amended 
        by striking section 1397E (and by striking the item 
        relating to such section in the table of sections for 
        such part).
            (2) Section 54(l)(3)(B) is amended by inserting 
        ``(as in effect before its repeal by the Tax Cuts and 
        Jobs Act)'' after ``section 1397E(I)''.
            (3) Section 6211(b)(4)(A) is amended by striking 
        ``, and 6431'' and inserting ``and'' before ``36B''.
            (4) Section 6401(b)(1) is amended by striking ``G, 
        H, I, and J'' and inserting ``and G''.
    (d) Effective Date.--The amendments made by this section 
shall apply to bonds issued after December 31, 2017.

    PART VI--PROVISIONS RELATED TO SPECIFIC ENTITIES AND INDUSTRIES

                   Subpart A--Partnership Provisions

SEC. 13501. TREATMENT OF GAIN OR LOSS OF FOREIGN PERSONS FROM SALE OR 
                    EXCHANGE OF INTERESTS IN PARTNERSHIPS ENGAGED IN 
                    TRADE OR BUSINESS WITHIN THE UNITED STATES.

    (a) Amount Treated as Effectively Connected.--
            (1) In general.--Section 864(c) is amended by 
        adding at the end the following:
            ``(8) Gain or loss of foreign persons from sale or 
        exchange of certain partnership interests.--
                    ``(A) In general.--Notwithstanding any 
                other provision of this subtitle, if a 
                nonresident alien individual or foreign 
                corporation owns, directly or indirectly, an 
                interest in a partnership which is engaged in 
                any trade or business within the United States, 
                gain or loss on the sale or exchange of all (or 
                any portion of) such interest shall be treated 
                as effectively connected with the conduct of 
                such trade or business to the extent such gain 
                or loss does not exceed the amount determined 
                under subparagraph (B).
                    ``(B) Amount treated as effectively 
                connected.--The amount determined under this 
                subparagraph with respect to any partnership 
                interest sold or exchanged--
                            ``(i) in the case of any gain on 
                        the sale or exchange of the partnership 
                        interest, is--
                                    ``(I) the portion of the 
                                partner's distributive share of 
                                the amount of gain which would 
                                have been effectively connected 
                                with the conduct of a trade or 
                                business within the United 
                                States if the partnership had 
                                sold all of its assets at their 
                                fair market value as of the 
                                date of the sale or exchange of 
                                such interest, or
                                    ``(II) zero if no gain on 
                                such deemed sale would have 
                                been so effectively connected, 
                                and
                            ``(ii) in the case of any loss on 
                        the sale or exchange of the partnership 
                        interest, is--
                                    ``(I) the portion of the 
                                partner's distributive share of 
                                the amount of loss on the 
                                deemed sale described in clause 
                                (i)(I) which would have been so 
                                effectively connected, or
                                    ``(II) zero if no loss on 
                                such deemed sale would be have 
                                been so effectively connected.
                        For purposes of this subparagraph, a 
                        partner's distributive share of gain or 
                        loss on the deemed sale shall be 
                        determined in the same manner as such 
                        partner's distributive share of the 
                        non-separately stated taxable income or 
                        loss of such partnership.
                    ``(C) Coordination with united states real 
                property interests.--If a partnership described 
                in subparagraph (A) holds any United States 
                real property interest (as defined in section 
                897(c)) at the time of the sale or exchange of 
                the partnership interest, then the gain or loss 
                treated as effectively connected income under 
                subparagraph (A) shall be reduced by the amount 
                so treated with respect to such United States 
                real property interest under section 897.
                    ``(D) Sale or exchange.--For purposes of 
                this paragraph, the term `sale or exchange' 
                means any sale, exchange, or other disposition.
                    ``(E) Secretarial authority.--The Secretary 
                shall prescribe such regulations or other 
                guidance as the Secretary determines 
                appropriate for the application of this 
                paragraph, including with respect to exchanges 
                described in section 332, 351, 354, 355, 356, 
                or 361.''.
            (2) Conforming amendments.--Section 864(c)(1) is 
        amended--
                    (A) by striking ``and (7)'' in subparagraph 
                (A), and inserting ``(7), and (8)'', and
                    (B) by striking ``or (7)'' in subparagraph 
                (B), and inserting ``(7), or (8)''.
    (b) Withholding Requirements.--Section 1446 is amended by 
redesignating subsection (f) as subsection (g) and by inserting 
after subsection (e) the following:
    ``(f) Special Rules for Withholding on Dispositions of 
Partnership Interests.--
            ``(1) In general.--Except as provided in this 
        subsection, if any portion of the gain (if any) on any 
        disposition of an interest in a partnership would be 
        treated under section 864(c)(8) as effectively 
        connected with the conduct of a trade or business 
        within the United States, the transferee shall be 
        required to deduct and withhold a tax equal to 10 
        percent of the amount realized on the disposition.
            ``(2) Exception if nonforeign affidavit 
        furnished.--
                    ``(A) In general.--No person shall be 
                required to deduct and withhold any amount 
                under paragraph (1) with respect to any 
                disposition if the transferor furnishes to the 
                transferee an affidavit by the transferor 
                stating, under penalty of perjury, the 
                transferor's United States taxpayer 
                identification number and that the transferor 
                is not a foreign person.
                    ``(B) False affidavit.--Subparagraph (A) 
                shall not apply to any disposition if--
                            ``(i) the transferee has actual 
                        knowledge that the affidavit is false, 
                        or the transferee receives a notice (as 
                        described in section 1445(d)) from a 
                        transferor's agent or transferee's 
                        agent that such affidavit or statement 
                        is false, or
                            ``(ii) the Secretary by regulations 
                        requires the transferee to furnish a 
                        copy of such affidavit or statement to 
                        the Secretary and the transferee fails 
                        to furnish a copy of such affidavit or 
                        statement to the Secretary at such time 
                        and in such manner as required by such 
                        regulations.
                    ``(C) Rules for agents.--The rules of 
                section 1445(d) shall apply to a transferor's 
                agent or transferee's agent with respect to any 
                affidavit described in subparagraph (A) in the 
                same manner as such rules apply with respect to 
                the disposition of a United States real 
                property interest under such section.
            ``(3) Authority of secretary to prescribe reduced 
        amount.--At the request of the transferor or 
        transferee, the Secretary may prescribe a reduced 
        amount to be withheld under this section if the 
        Secretary determines that to substitute such reduced 
        amount will not jeopardize the collection of the tax 
        imposed under this title with respect to gain treated 
        under section 864(c)(8) as effectively connected with 
        the conduct of a trade or business with in the United 
        States.
            ``(4) Partnership to withhold amounts not withheld 
        by the transferee.--If a transferee fails to withhold 
        any amount required to be withheld under paragraph (1), 
        the partnership shall be required to deduct and 
        withhold from distributions to the transferee a tax in 
        an amount equal to the amount the transferee failed to 
        withhold (plus interest under this title on such 
        amount).
            ``(5) Definitions.--Any term used in this 
        subsection which is also used under section 1445 shall 
        have the same meaning as when used in such section.
            ``(6) Regulations.--The Secretary shall prescribe 
        such regulations or other guidance as may be necessary 
        to carry out the purposes of this subsection, including 
        regulations providing for exceptions from the 
        provisions of this subsection.''.
    (c) Effective Dates.--
            (1) Subsection (a).--The amendments made by 
        subsection (a) shall apply to sales, exchanges, and 
        dispositions on or after November 27, 2017.
            (2) Subsection (b).--The amendment made by 
        subsection (b) shall apply to sales, exchanges, and 
        dispositions after December 31, 2017.

SEC. 13502. MODIFY DEFINITION OF SUBSTANTIAL BUILT-IN LOSS IN THE CASE 
                    OF TRANSFER OF PARTNERSHIP INTEREST.

    (a) In General.--Paragraph (1) of section 743(d) is to read 
as follows:
            ``(1) In general.--For purposes of this section, a 
        partnership has a substantial built-in loss with 
        respect to a transfer of an interest in the partnership 
        if--
                    ``(A) the partnership's adjusted basis in 
                the partnership property exceeds by more than 
                $250,000 the fair market value of such 
                property, or
                    ``(B) the transferee partner would be 
                allocated a loss of more than $250,000 if the 
                partnership assets were sold for cash equal to 
                their fair market value immediately after such 
                transfer.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to transfers of partnership interests after 
December 31, 2017.

SEC. 13503. CHARITABLE CONTRIBUTIONS AND FOREIGN TAXES TAKEN INTO 
                    ACCOUNT IN DETERMINING LIMITATION ON ALLOWANCE OF 
                    PARTNER'S SHARE OF LOSS.

    (a) In General.--Subsection (d) of section 704 is amended--
            (1) by striking ``A partner's distributive share'' 
        and inserting the following:
            ``(1) In general.--A partner's distributive 
        share'',
            (2) by striking ``Any excess of such loss'' and 
        inserting the following:
            ``(2) Carryover.--Any excess of such loss'', and
            (3) by adding at the end the following new 
        paragraph:
            ``(3) Special rules.--
                    ``(A) In general.--In determining the 
                amount of any loss under paragraph (1), there 
                shall be taken into account the partner's 
                distributive share of amounts described in 
                paragraphs (4) and (6) of section 702(a).
                    ``(B) Exception.--In the case of a 
                charitable contribution of property whose fair 
                market value exceeds its adjusted basis, 
                subparagraph (A) shall not apply to the extent 
                of the partner's distributive share of such 
                excess.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years beginning after 
December 31, 2017.

SEC. 13504. REPEAL OF TECHNICAL TERMINATION OF PARTNERSHIPS.

    (a) In General.--Paragraph (1) of section 708(b) is 
amended--
            (1) by striking ``, or'' at the end of subparagraph 
        (A) and all that follows and inserting a period, and
            (2) by striking ``only if--'' and all that follows 
        through ``no part of any business'' and inserting the 
        following: ``only if no part of any business''.
    (b) Conforming Amendment.--
            (1) Section 168(i)(7)(B) is amended by striking the 
        second sentence.
            (2) Section 743(e) is amended by striking paragraph 
        (4) and redesignating paragraphs (5), (6), and (7) as 
        paragraphs (4), (5), and (6).
    (c) Effective Date.--The amendments made by this section 
shall apply to partnership taxable years beginning after 
December 31, 2017.

                      Subpart B--Insurance Reforms

SEC. 13511. NET OPERATING LOSSES OF LIFE INSURANCE COMPANIES.

    (a) In General.--Section 805(b) is amended by striking 
paragraph (4) and by redesignating paragraph (5) as paragraph 
(4).
    (b) Conforming Amendments.--
            (1) Part I of subchapter L of chapter 1 is amended 
        by striking section 810 (and by striking the item 
        relating to such section in the table of sections for 
        such part).
            (2)(A) Part III of subchapter L of chapter 1 is 
        amended by striking section 844 (and by striking the 
        item relating to such section in the table of sections 
        for such part).
            (B) Section 831(b)(3) is amended by striking 
        ``except as provided in section 844,''
            (3) Section 381 is amended by striking subsection 
        (d).
            (4) Section 805(a)(4)(B)(ii) is amended to read as 
        follows:
                            ``(ii) the deduction allowed under 
                        section 172,''.
            (5) Section 805(a) is amended by striking paragraph 
        (5).
            (6) Section 805(b)(2)(A)(iv) is amended to read as 
        follows:
                            ``(iv) any net operating loss 
                        carryback to the taxable year under 
                        section 172, and''.
            (7) Section 953(b)(1)(B) is amended to read as 
        follows:
                    ``(B) So much of section 805(a)(8) as 
                relates to the deduction allowed under section 
                172.''.
            (8) Section 1351(i)(3) is amended by striking ``or 
        the operations loss deduction under section 810,''.
    (c) Effective Date.--The amendments made by this section 
shall apply to losses arising in taxable years beginning after 
December 31, 2017.

SEC. 13512. REPEAL OF SMALL LIFE INSURANCE COMPANY DEDUCTION.

    (a) In General.--Part I of subchapter L of chapter 1 is 
amended by striking section 806 (and by striking the item 
relating to such section in the table of sections for such 
part).
    (b) Conforming Amendments.--
            (1) Section 453B(e) is amended--
                    (A) by striking ``(as defined in section 
                806(b)(3))'' in paragraph (2)(B), and
                    (B) by adding at the end the following new 
                paragraph:
            ``(3) Noninsurance business.--
                    ``(A) In general.--For purposes of this 
                subsection, the term `noninsurance business' 
                means any activity which is not an insurance 
                business.
                    ``(B) Certain activities treated as 
                insurance businesses.--For purposes of 
                subparagraph (A), any activity which is not an 
                insurance business shall be treated as an 
                insurance business if--
                            ``(i) it is of a type traditionally 
                        carried on by life insurance companies 
                        for investment purposes, but only if 
                        the carrying on of such activity (other 
                        than in the case of real estate) does 
                        not constitute the active conduct of a 
                        trade or business, or
                            ``(ii) it involves the performance 
                        of administrative services in 
                        connection with plans providing life 
                        insurance, pension, or accident and 
                        health benefits.''.
            (2) Section 465(c)(7)(D)(v)(II) is amended by 
        striking ``section 806(b)(3)'' and inserting ``section 
        453B(e)(3)''.
            (3) Section 801(a)(2) is amended by striking 
        subparagraph (C).
            (4) Section 804 is amended by striking ``means--'' 
        and all that follows and inserting ``means the general 
        deductions provided in section 805.''.
            (5) Section 805(a)(4)(B), as amended by this Act, 
        is amended by striking clause (i) and by redesignating 
        clauses (ii), (iii), and (iv) as clauses (i), (ii), and 
        (iii), respectively.
            (6) Section 805(b)(2)(A), as amended by this Act, 
        is amended by striking clause (iii) and by 
        redesignating clauses (iv) and (v) as clauses (iii) and 
        (iv), respectively.
            (7) Section 842(c) is amended by striking paragraph 
        (1) and by redesignating paragraphs (2) and (3) as 
        paragraphs (1) and (2), respectively.
            (8) Section 953(b)(1), as amended by section 13511, 
        is amended by striking subparagraph (A) and by 
        redesignating subparagraphs (B) and (C) as 
        subparagraphs (A) and (B), respectively.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13513. ADJUSTMENT FOR CHANGE IN COMPUTING RESERVES.

    (a) In General.--Paragraph (1) of section 807(f) is amended 
to read as follows:
            ``(1) Treatment as change in method of 
        accounting.--If the basis for determining any item 
        referred to in subsection (c) as of the close of any 
        taxable year differs from the basis for such 
        determination as of the close of the preceding taxable 
        year, then so much of the difference between--
                    ``(A) the amount of the item at the close 
                of the taxable year, computed on the new basis, 
                and
                    ``(B) the amount of the item at the close 
                of the taxable year, computed on the old basis,
        as is attributable to contracts issued before the 
        taxable year shall be taken into account under section 
        481 as adjustments attributable to a change in method 
        of accounting initiated by the taxpayer and made with 
        the consent of the Secretary.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13514. REPEAL OF SPECIAL RULE FOR DISTRIBUTIONS TO SHAREHOLDERS 
                    FROM PRE-1984 POLICYHOLDERS SURPLUS ACCOUNT.

    (a) In General.--Subpart D of part I of subchapter L is 
amended by striking section 815 (and by striking the item 
relating to such section in the table of sections for such 
subpart).
    (b) Conforming Amendment.--Section 801 is amended by 
striking subsection (c).
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.
    (d) Phased Inclusion of Remaining Balance of Policyholders 
Surplus Accounts.--In the case of any stock life insurance 
company which has a balance (determined as of the close of such 
company's last taxable year beginning before January 1, 2018) 
in an existing policyholders surplus account (as defined in 
section 815 of the Internal Revenue Code of 1986, as in effect 
before its repeal), the tax imposed by section 801 of such Code 
for the first 8 taxable years beginning after December 31, 
2017, shall be the amount which would be imposed by such 
section for such year on the sum of--
            (1) life insurance company taxable income for such 
        year (within the meaning of such section 801 but not 
        less than zero), plus
            (2) \1/8\ of such balance.

SEC. 13515. MODIFICATION OF PRORATION RULES FOR PROPERTY AND CASUALTY 
                    INSURANCE COMPANIES.

    (a) In General.--Section 832(b)(5)(B) is amended--
            (1) by striking ``15 percent'' and inserting ``the 
        applicable percentage'', and
            (2) by inserting at the end the following new 
        sentence: ``For purposes of this subparagraph, the 
        applicable percentage is 5.25 percent divided by the 
        highest rate in effect under section 11(b).''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13516. REPEAL OF SPECIAL ESTIMATED TAX PAYMENTS.

    (a) In General.--Part III of subchapter L of chapter 1 is 
amended by striking section 847 (and by striking the item 
relating to such section in the table of sections for such 
part).
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13517. COMPUTATION OF LIFE INSURANCE TAX RESERVES.

    (a) In General.--
            (1) Appropriate rate of interest.--The second 
        sentence of section 807(c) is amended to read as 
        follows: ``For purposes of paragraph (3), the 
        appropriate rate of interest is the highest rate or 
        rates permitted to be used to discount the obligations 
        by the National Association of Insurance Commissioners 
        as of the date the reserve is determined.''.
            (2) Method of computing reserves.--Section 807(d) 
        is amended--
                    (A) by striking paragraphs (1), (2), (4), 
                and (5),
                    (B) by redesignating paragraph (6) as 
                paragraph (4),
                    (C) by inserting before paragraph (3) the 
                following new paragraphs:
            ``(1) Determination of reserve.--
                    ``(A) In general.--For purposes of this 
                part (other than section 816), the amount of 
                the life insurance reserves for any contract 
                (other than a contract to which subparagraph 
                (B) applies) shall be the greater of--
                            ``(i) the net surrender value of 
                        such contract, or
                            ``(ii) 92.81 percent of the reserve 
                        determined under paragraph (2).
                    ``(B) Variable contracts.--For purposes of 
                this part (other than section 816), the amount 
                of the life insurance reserves for a variable 
                contract shall be equal to the sum of--
                            ``(i) the greater of--
                                    ``(I) the net surrender 
                                value of such contract, or
                                    ``(II) the portion of the 
                                reserve that is separately 
                                accounted for under section 
                                817, plus
                            ``(ii) 92.81 percent of the excess 
                        (if any) of the reserve determined 
                        under paragraph (2) over the amount in 
                        clause (i).
                    ``(C) Statutory cap.--In no event shall the 
                reserves determined under subparagraphs (A) or 
                (B) for any contract as of any time exceed the 
                amount which would be taken into account with 
                respect to such contract as of such time in 
                determining statutory reserves (as defined in 
                paragraph (4)).
                    ``(D) No double counting.--In no event 
                shall any amount or item be taken into account 
                more than once in determining any reserve under 
                this subchapter.
            ``(2) Amount of reserve.--The amount of the reserve 
        determined under this paragraph with respect to any 
        contract shall be determined by using the tax reserve 
        method applicable to such contract.''.
                    (D) by striking ``(other than a qualified 
                long-term care insurance contract, as defined 
                in section 7702B(b)), a 2-year full preliminary 
                term method'' in paragraph (3)(A)(iii) and 
                inserting ``, the reserve method prescribed by 
                the National Association of Insurance 
                Commissioners which covers such contract as of 
                the date the reserve is determined'',
                    (E) by striking ``(as of the date of 
                issuance)'' in paragraph (3)(A)(iv)(I) and 
                inserting ``(as of the date the reserve is 
                determined)'',
                    (F) by striking ``as of the date of the 
                issuance of'' in paragraph (3)(A)(iv)(II) and 
                inserting ``as of the date the reserve is 
                determined for'',
                    (G) by striking ``in effect on the date of 
                the issuance of the contract'' in paragraph 
                (3)(B)(i) and inserting ``applicable to the 
                contract and in effect as of the date the 
                reserve is determined'', and
                    (H) by striking ``in effect on the date of 
                the issuance of the contract'' in paragraph 
                (3)(B)(ii) and inserting ``applicable to the 
                contract and in effect as of the date the 
                reserve is determined''.
            (3) Special rules.--Section 807(e) is amended--
                    (A) by striking paragraphs (2) and (5),
                    (B) by redesignating paragraphs (3), (4), 
                (6), and (7) as paragraphs (2), (3), (4), and 
                (5), respectively,
                    (C) by amending paragraph (2) (as so 
                redesignated) to read as follows:
            ``(2) Qualified supplemental benefits.--
                    ``(A) Qualified supplemental benefits 
                treated separately.--For purposes of this part, 
                the amount of the life insurance reserve for 
                any qualified supplemental benefit shall be 
                computed separately as though such benefit were 
                under a separate contract.
                    ``(B) Qualified supplemental benefit.--For 
                purposes of this paragraph, the term `qualified 
                supplemental benefit' means any supplemental 
                benefit described in subparagraph (C) if--
                            ``(i) there is a separately 
                        identified premium or charge for such 
                        benefit, and
                            ``(ii) any net surrender value 
                        under the contract attributable to any 
                        other benefit is not available to fund 
                        such benefit.
                    ``(C) Supplemental benefits.--For purposes 
                of this paragraph, the supplemental benefits 
                described in this subparagraph are any--
                            ``(i) guaranteed insurability,
                            ``(ii) accidental death or 
                        disability benefit,
                            ``(iii) convertibility,
                            ``(iv) disability waiver benefit, 
                        or
                            ``(v) other benefit prescribed by 
                        regulations,
                which is supplemental to a contract for which 
                there is a reserve described in subsection 
                (c).'', and
                    (D) by adding at the end the following new 
                paragraph:
            ``(6) Reporting rules.--The Secretary shall require 
        reporting (at such time and in such manner as the 
        Secretary shall prescribe) with respect to the opening 
        balance and closing balance of reserves and with 
        respect to the method of computing reserves for 
        purposes of determining income.''.
            (4) Definition of life insurance contract.--Section 
        7702 is amended--
                    (A) by striking clause (i) of subsection 
                (c)(3)(B) and inserting the following:
                            ``(i) reasonable mortality charges 
                        which meet the requirements prescribed 
                        in regulations to be promulgated by the 
                        Secretary or that do not exceed the 
                        mortality charges specified in the 
                        prevailing commissioners' standard 
                        tables as defined in subsection 
                        (f)(10),'' and
                    (B) by adding at the end of subsection (f) 
                the following new paragraph:
            ``(10) Prevailing commissioners' standard tables.--
        For purposes of subsection (c)(3)(B)(i), the term 
        `prevailing commissioners' standard tables' means the 
        most recent commissioners' standard tables prescribed 
        by the National Association of Insurance Commissioners 
        which are permitted to be used in computing reserves 
        for that type of contract under the insurance laws of 
        at least 26 States when the contract was issued. If the 
        prevailing commissioners' standard tables as of the 
        beginning of any calendar year (hereinafter in this 
        paragraph referred to as the `year of change') are 
        different from the prevailing commissioners' standard 
        tables as of the beginning of the preceding calendar 
        year, the issuer may use the prevailing commissioners' 
        standard tables as of the beginning of the preceding 
        calendar year with respect to any contract issued after 
        the change and before the close of the 3-year period 
        beginning on the first day of the year of change.''.
    (b) Conforming Amendments.--
            (1) Section 808 is amended by adding at the end the 
        following new subsection:
    ``(g) Prevailing State Assumed Interest Rate.--For purposes 
of this subchapter--
            ``(1) In general.--The term `prevailing State 
        assumed interest rate' means, with respect to any 
        contract, the highest assumed interest rate permitted 
        to be used in computing life insurance reserves for 
        insurance contracts or annuity contracts (as the case 
        may be) under the insurance laws of at least 26 States. 
        For purposes of the preceding sentence, the effect of 
        nonforfeiture laws of a State on interest rates for 
        reserves shall not be taken into account.
            ``(2) When rate determined.--The prevailing State 
        assumed interest rate with respect to any contract 
        shall be determined as of the beginning of the calendar 
        year in which the contract was issued.''.
            (2) Paragraph (1) of section 811(d) is amended by 
        striking ``the greater of the prevailing State assumed 
        interest rate or applicable Federal interest rate in 
        effect under section 807'' and inserting ``the interest 
        rate in effect under section 808(g)''.
            (3) Subparagraph (A) of section 846(f)(6) is 
        amended by striking ``except that'' and all that 
        follows and inserting ``except that the limitation of 
        subsection (a)(3) shall apply, and''.
            (4) Section 848(e)(1)(B)(iii) is amended by 
        striking ``807(e)(4)'' and inserting ``807(e)(3)''.
            (5) Subparagraph (B) of section 954(i)(5) is 
        amended by striking ``shall be substituted for the 
        prevailing State assumed interest rate,'' and inserting 
        ``shall apply,''.
    (c) Effective Date.--
            (1) In general.--The amendments made by this 
        section shall apply to taxable years beginning after 
        December 31, 2017.
            (2) Transition rule.--For the first taxable year 
        beginning after December 31, 2017, the reserve with 
        respect to any contract (as determined under section 
        807(d) of the Internal Revenue Code of 1986) at the end 
        of the preceding taxable year shall be determined as if 
        the amendments made by this section had applied to such 
        reserve in such preceding taxable year.
            (3) Transition relief.--
                    (A) In general.--If--
                            (i) the reserve determined under 
                        section 807(d) of the Internal Revenue 
                        Code of 1986 (determined after 
                        application of paragraph (2)) with 
                        respect to any contract as of the close 
                        of the year preceding the first taxable 
                        year beginning after December 31, 2017, 
                        differs from
                            (ii) the reserve which would have 
                        been determined with respect to such 
                        contract as of the close of such 
                        taxable year under such section 
                        determined without regard to paragraph 
                        (2),
                then the difference between the amount of the 
                reserve described in clause (i) and the amount 
                of the reserve described in clause (ii) shall 
                be taken into account under the method provided 
                in subparagraph (B).
                    (B) Method.--The method provided in this 
                subparagraph is as follows:
                            (i) If the amount determined under 
                        subparagraph (A)(i) exceeds the amount 
                        determined under subparagraph (A)(ii), 
                        1/8 of such excess shall be taken into 
                        account, for each of the 8 succeeding 
                        taxable years, as a deduction under 
                        section 805(a)(2) or 832(c)(4) of such 
                        Code, as applicable.
                            (ii) If the amount determined under 
                        subparagraph (A)(ii) exceeds the amount 
                        determined under subparagraph (A)(i), 
                        1/8 of such excess shall be included in 
                        gross income, for each of the 8 
                        succeeding taxable years, under section 
                        803(a)(2) or 832(b)(1)(C) of such Code, 
                        as applicable.

SEC. 13518. MODIFICATION OF RULES FOR LIFE INSURANCE PRORATION FOR 
                    PURPOSES OF DETERMINING THE DIVIDENDS RECEIVED 
                    DEDUCTION.

    (a) In General.--Section 812 is amended to read as follows:

``SEC. 812. DEFINITION OF COMPANY'S SHARE AND POLICYHOLDER'S SHARE.

    ``(a) Company's Share.--For purposes of section 805(a)(4), 
the term `company's share' means, with respect to any taxable 
year beginning after December 31, 2017, 70 percent.
    ``(b) Policyholder's Share.--For purposes of section 807, 
the term `policyholder's share' means, with respect to any 
taxable year beginning after December 31, 2017, 30 percent.''.
    (b) Conforming Amendment.--Section 817A(e)(2) is amended by 
striking ``, 807(d)(2)(B), and 812'' and inserting ``and 
807(d)(2)(B)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13519. CAPITALIZATION OF CERTAIN POLICY ACQUISITION EXPENSES.

    (a) In General.--
            (1) Section 848(a)(2) is amended by striking ``120-
        month'' and inserting ``180-month''.
            (2) Section 848(c)(1) is amended by striking ``1.75 
        percent'' and inserting ``2.09 percent''.
            (3) Section 848(c)(2) is amended by striking ``2.05 
        percent'' and inserting ``2.45 percent''.
            (4) Section 848(c)(3) is amended by striking ``7.7 
        percent'' and inserting ``9.2 percent''.
    (b) Conforming Amendments.--Section 848(b)(1) is amended by 
striking ``120-month'' and inserting ``180-month''.
    (c) Effective Date.--
            (1) In general.--The amendments made by this 
        section shall apply to net premiums for taxable years 
        beginning after December 31, 2017.
            (2) Transition rule.--Specified policy acquisition 
        expenses first required to be capitalized in a taxable 
        year beginning before January 1, 2018, will continue to 
        be allowed as a deduction ratably over the 120-month 
        period beginning with the first month in the second 
        half of such taxable year.

SEC. 13520. TAX REPORTING FOR LIFE SETTLEMENT TRANSACTIONS.

    (a) In General.--Subpart B of part III of subchapter A of 
chapter 61, as amended by section 13306, is amended by adding 
at the end the following new section:

``SEC. 6050Y. RETURNS RELATING TO CERTAIN LIFE INSURANCE CONTRACT 
                    TRANSACTIONS.

    ``(a) Requirement of Reporting of Certain Payments.--
            ``(1) In general.--Every person who acquires a life 
        insurance contract or any interest in a life insurance 
        contract in a reportable policy sale during any taxable 
        year shall make a return for such taxable year (at such 
        time and in such manner as the Secretary shall 
        prescribe) setting forth--
                    ``(A) the name, address, and TIN of such 
                person,
                    ``(B) the name, address, and TIN of each 
                recipient of payment in the reportable policy 
                sale,
                    ``(C) the date of such sale,
                    ``(D) the name of the issuer of the life 
                insurance contract sold and the policy number 
                of such contract, and
                    ``(E) the amount of each payment.
            ``(2) Statement to be furnished to persons with 
        respect to whom information is required.--Every person 
        required to make a return under this subsection shall 
        furnish to each person whose name is required to be set 
        forth in such return a written statement showing--
                    ``(A) the name, address, and phone number 
                of the information contact of the person 
                required to make such return, and
                    ``(B) the information required to be shown 
                on such return with respect to such person, 
                except that in the case of an issuer of a life 
                insurance contract, such statement is not 
                required to include the information specified 
                in paragraph (1)(E).
    ``(b) Requirement of Reporting of Seller's Basis in Life 
Insurance Contracts.--
            ``(1) In general.--Upon receipt of the statement 
        required under subsection (a)(2) or upon notice of a 
        transfer of a life insurance contract to a foreign 
        person, each issuer of a life insurance contract shall 
        make a return (at such time and in such manner as the 
        Secretary shall prescribe) setting forth--
                    ``(A) the name, address, and TIN of the 
                seller who transfers any interest in such 
                contract in such sale,
                    ``(B) the investment in the contract (as 
                defined in section 72(e)(6)) with respect to 
                such seller, and
                    ``(C) the policy number of such contract.
            ``(2) Statement to be furnished to persons with 
        respect to whom information is required.--Every person 
        required to make a return under this subsection shall 
        furnish to each person whose name is required to be set 
        forth in such return a written statement showing--
                    ``(A) the name, address, and phone number 
                of the information contact of the person 
                required to make such return, and
                    ``(B) the information required to be shown 
                on such return with respect to each seller 
                whose name is required to be set forth in such 
                return.
    ``(c) Requirement of Reporting With Respect to Reportable 
Death Benefits.--
            ``(1) In general.--Every person who makes a payment 
        of reportable death benefits during any taxable year 
        shall make a return for such taxable year (at such time 
        and in such manner as the Secretary shall prescribe) 
        setting forth--
                    ``(A) the name, address, and TIN of the 
                person making such payment,
                    ``(B) the name, address, and TIN of each 
                recipient of such payment,
                    ``(C) the date of each such payment,
                    ``(D) the gross amount of each such 
                payment, and
                    ``(E) such person's estimate of the 
                investment in the contract (as defined in 
                section 72(e)(6)) with respect to the buyer.
            ``(2) Statement to be furnished to persons with 
        respect to whom information is required.--Every person 
        required to make a return under this subsection shall 
        furnish to each person whose name is required to be set 
        forth in such return a written statement showing--
                    ``(A) the name, address, and phone number 
                of the information contact of the person 
                required to make such return, and
                    ``(B) the information required to be shown 
                on such return with respect to each recipient 
                of payment whose name is required to be set 
                forth in such return.
    ``(d) Definitions.--For purposes of this section:
            ``(1) Payment.--The term `payment' means, with 
        respect to any reportable policy sale, the amount of 
        cash and the fair market value of any consideration 
        transferred in the sale.
            ``(2) Reportable policy sale.--The term `reportable 
        policy sale' has the meaning given such term in section 
        101(a)(3)(B).
            ``(3) Issuer.--The term `issuer' means any life 
        insurance company that bears the risk with respect to a 
        life insurance contract on the date any return or 
        statement is required to be made under this section.
            ``(4) Reportable death benefits.--The term 
        `reportable death benefits' means amounts paid by 
        reason of the death of the insured under a life 
        insurance contract that has been transferred in a 
        reportable policy sale.''.
    (b) Clerical Amendment.--The table of sections for subpart 
B of part III of subchapter A of chapter 61, as amended by 
section 13306, is amended by inserting after the item relating 
to section 6050X the following new item:

``Sec. 6050Y. Returns relating to certain life insurance contract 
          transactions.''.

    (c) Conforming Amendments.--
            (1) Subsection (d) of section 6724 is amended--
                    (A) by striking ``or'' at the end of clause 
                (xxiv) of paragraph (1)(B), by striking ``and'' 
                at the end of clause (xxv) of such paragraph 
                and inserting ``or'', and by inserting after 
                such clause (xxv) the following new clause:
                            ``(xxvi) section 6050Y (relating to 
                        returns relating to certain life 
                        insurance contract transactions), 
                        and'', and
                    (B) by striking ``or'' at the end of 
                subparagraph (HH) of paragraph (2), by striking 
                the period at the end of subparagraph (II) of 
                such paragraph and inserting ``, or'', and by 
                inserting after such subparagraph (II) the 
                following new subparagraph:
                    ``(JJ) subsection (a)(2), (b)(2), or (c)(2) 
                of section 6050Y (relating to returns relating 
                to certain life insurance contract 
                transactions).''.
            (2) Section 6047 is amended--
                    (A) by redesignating subsection (g) as 
                subsection (h),
                    (B) by inserting after subsection (f) the 
                following new subsection:
    ``(g) Information Relating to Life Insurance Contract 
Transactions.--This section shall not apply to any information 
which is required to be reported under section 6050Y.'', and
                    (C) by adding at the end of subsection (h), 
                as so redesignated, the following new 
                paragraph:
            ``(4) For provisions requiring reporting of 
        information relating to certain life insurance contract 
        transactions, see section 6050Y.''.
    (d) Effective Date.--The amendments made by this section 
shall apply to--
            (1) reportable policy sales (as defined in section 
        6050Y(d)(2) of the Internal Revenue Code of 1986 (as 
        added by subsection (a)) after December 31, 2017, and
            (2) reportable death benefits (as defined in 
        section 6050Y(d)(4) of such Code (as added by 
        subsection (a)) paid after December 31, 2017.

SEC. 13521. CLARIFICATION OF TAX BASIS OF LIFE INSURANCE CONTRACTS.

    (a) Clarification With Respect to Adjustments.--Paragraph 
(1) of section 1016(a) is amended by striking subparagraph (A) 
and all that follows and inserting the following:
                    ``(A) for--
                            ``(i) taxes or other carrying 
                        charges described in section 266; or
                            ``(ii) expenditures described in 
                        section 173 (relating to circulation 
                        expenditures),
                for which deductions have been taken by the 
                taxpayer in determining taxable income for the 
                taxable year or prior taxable years; or
                    ``(B) for mortality, expense, or other 
                reasonable charges incurred under an annuity or 
                life insurance contract;''.
    (b) Effective Date.--The amendment made by this section 
shall apply to transactions entered into after August 25, 2009.

SEC. 13522. EXCEPTION TO TRANSFER FOR VALUABLE CONSIDERATION RULES.

    (a) In General.--Subsection (a) of section 101 is amended 
by inserting after paragraph (2) the following new paragraph:
            ``(3) Exception to valuable consideration rules for 
        commercial transfers.--
                    ``(A) In general.--The second sentence of 
                paragraph (2) shall not apply in the case of a 
                transfer of a life insurance contract, or any 
                interest therein, which is a reportable policy 
                sale.
                    ``(B) Reportable policy sale.--For purposes 
                of this paragraph, the term `reportable policy 
                sale' means the acquisition of an interest in a 
                life insurance contract, directly or 
                indirectly, if the acquirer has no substantial 
                family, business, or financial relationship 
                with the insured apart from the acquirer's 
                interest in such life insurance contract. For 
                purposes of the preceding sentence, the term 
                `indirectly' applies to the acquisition of an 
                interest in a partnership, trust, or other 
                entity that holds an interest in the life 
                insurance contract.''.
    (b) Conforming Amendment.--Paragraph (1) of section 101(a) 
is amended by striking ``paragraph (2)'' and inserting 
``paragraphs (2) and (3)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to transfers after December 31, 2017.

SEC. 13523. MODIFICATION OF DISCOUNTING RULES FOR PROPERTY AND CASUALTY 
                    INSURANCE COMPANIES.

    (a) Modification of Rate of Interest Used to Discount 
Unpaid Losses.--Paragraph (2) of section 846(c) is amended to 
read as follows:
            ``(2) Determination of annual rate.--The annual 
        rate determined by the Secretary under this paragraph 
        for any calendar year shall be a rate determined on the 
        basis of the corporate bond yield curve (as defined in 
        section 430(h)(2)(D)(i), determined by substituting 
        `60-month period' for `24-month period' therein).''.
    (b) Modification of Computational Rules for Loss Payment 
Patterns.--Section 846(d)(3) is amended by striking 
subparagraphs (B) through (G) and inserting the following new 
subparagraph:
                    ``(B) Treatment of certain losses.--
                            ``(i) 3-year loss payment 
                        pattern.--In the case of any line of 
                        business not described in subparagraph 
                        (A)(ii), losses paid after the 1st year 
                        following the accident year shall be 
                        treated as paid equally in the 2nd and 
                        3rd year following the accident year.
                            ``(ii) 10-year loss payment 
                        pattern.--
                                    ``(I) In general.--The 
                                period taken into account under 
                                subparagraph (A)(ii) shall be 
                                extended to the extent required 
                                under subclause (II).
                                    ``(II) Computation of 
                                extension.--The amount of 
                                losses which would have been 
                                treated as paid in the 10th 
                                year after the accident year 
                                shall be treated as paid in 
                                such 10th year and each 
                                subsequent year in an amount 
                                equal to the amount of the 
                                average of the losses treated 
                                as paid in the 7th, 8th, and 
                                9th years after the accident 
                                year (or, if lesser, the 
                                portion of the unpaid losses 
                                not theretofore taken into 
                                account). To the extent such 
                                unpaid losses have not been 
                                treated as paid before the 24th 
                                year after the accident year, 
                                they shall be treated as paid 
                                in such 24th year.''.
    (c) Repeal of Historical Payment Pattern Election.--Section 
846, as amended by this Act, is amended by striking subsection 
(e) and by redesignating subsections (f) and (g) as subsections 
(e) and (f), respectively.
    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.
    (e) Transitional Rule.--For the first taxable year 
beginning after December 31, 2017--
            (1) the unpaid losses and the expenses unpaid (as 
        defined in paragraphs (5)(B) and (6) of section 832(b) 
        of the Internal Revenue Code of 1986) at the end of the 
        preceding taxable year, and
            (2) the unpaid losses as defined in sections 
        807(c)(2) and 805(a)(1) of such Code at the end of the 
        preceding taxable year,
shall be determined as if the amendments made by this section 
had applied to such unpaid losses and expenses unpaid in the 
preceding taxable year and by using the interest rate and loss 
payment patterns applicable to accident years ending with 
calendar year 2018, and any adjustment shall be taken into 
account ratably in such first taxable year and the 7 succeeding 
taxable years. For subsequent taxable years, such amendments 
shall be applied with respect to such unpaid losses and 
expenses unpaid by using the interest rate and loss payment 
patterns applicable to accident years ending with calendar year 
2018.

               Subpart C--Banks and Financial Instruments

SEC. 13531. LIMITATION ON DEDUCTION FOR FDIC PREMIUMS.

    (a) In General.--Section 162, as amended by sections 13307, 
is amended by redesignating subsection (r) as subsection (s) 
and by inserting after subsection (q) the following new 
subsection:
    ``(r) Disallowance of FDIC Premiums Paid by Certain Large 
Financial Institutions.--
            ``(1) In general.--No deduction shall be allowed 
        for the applicable percentage of any FDIC premium paid 
        or incurred by the taxpayer.
            ``(2) Exception for small institutions.--Paragraph 
        (1) shall not apply to any taxpayer for any taxable 
        year if the total consolidated assets of such taxpayer 
        (determined as of the close of such taxable year) do 
        not exceed $10,000,000,000.
            ``(3) Applicable percentage.--For purposes of this 
        subsection, the term `applicable percentage' means, 
        with respect to any taxpayer for any taxable year, the 
        ratio (expressed as a percentage but not greater than 
        100 percent) which--
                    ``(A) the excess of--
                            ``(i) the total consolidated assets 
                        of such taxpayer (determined as of the 
                        close of such taxable year), over
                            ``(ii) $10,000,000,000, bears to
                    ``(B) $40,000,000,000.
            ``(4) FDIC premiums.--For purposes of this 
        subsection, the term `FDIC premium' means any 
        assessment imposed under section 7(b) of the Federal 
        Deposit Insurance Act (12 U.S.C. 1817(b)).
            ``(5) Total consolidated assets.--For purposes of 
        this subsection, the term `total consolidated assets' 
        has the meaning given such term under section 165 of 
        the Dodd-Frank Wall Street Reform and Consumer 
        Protection Act (12 U.S.C. 5365).
            ``(6) Aggregation rule.--
                    ``(A) In general.--Members of an expanded 
                affiliated group shall be treated as a single 
                taxpayer for purposes of applying this 
                subsection.
                    ``(B) Expanded affiliated group.--
                            ``(i) In general.--For purposes of 
                        this paragraph, the term `expanded 
                        affiliated group' means an affiliated 
                        group as defined in section 1504(a), 
                        determined--
                                    ``(I) by substituting `more 
                                than 50 percent' for `at least 
                                80 percent' each place it 
                                appears, and
                                    ``(II) without regard to 
                                paragraphs (2) and (3) of 
                                section 1504(b).
                            ``(ii) Control of non-corporate 
                        entities.--A partnership or any other 
                        entity (other than a corporation) shall 
                        be treated as a member of an expanded 
                        affiliated group if such entity is 
                        controlled (within the meaning of 
                        section 954(d)(3)) by members of such 
                        group (including any entity treated as 
                        a member of such group by reason of 
                        this clause).''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13532. REPEAL OF ADVANCE REFUNDING BONDS.

    (a) In General.--Paragraph (1) of section 149(d) is amended 
by striking ``as part of an issue described in paragraph (2), 
(3), or (4).'' and inserting ``to advance refund another 
bond.''.
    (b) Conforming Amendments.--
            (1) Section 149(d) is amended by striking 
        paragraphs (2), (3), (4), and (6) and by redesignating 
        paragraphs (5) and (7) as paragraphs (2) and (3).
            (2) Section 148(f)(4)(C) is amended by striking 
        clause (xiv) and by redesignating clauses (xv) to 
        (xvii) as clauses (xiv) to (xvi).
    (c) Effective Date.--The amendments made by this section 
shall apply to advance refunding bonds issued after December 
31, 2017.

                       Subpart D--S Corporations

SEC. 13541. EXPANSION OF QUALIFYING BENEFICIARIES OF AN ELECTING SMALL 
                    BUSINESS TRUST.

    (a) No Look-through for Eligibility Purposes.--Section 
1361(c)(2)(B)(v) is amended by adding at the end the following 
new sentence: ``This clause shall not apply for purposes of 
subsection (b)(1)(C).''.
    (b) Effective Date.--The amendment made by this section 
shall take effect on January 1, 2018.

SEC. 13542. CHARITABLE CONTRIBUTION DEDUCTION FOR ELECTING SMALL 
                    BUSINESS TRUSTS.

    (a) In General.--Section 641(c)(2) is amended by inserting 
after subparagraph (D) the following new subparagraph:
                    ``(E)(i) Section 642(c) shall not apply.
                    ``(ii) For purposes of section 
                170(b)(1)(G), adjusted gross income shall be 
                computed in the same manner as in the case of 
                an individual, except that the deductions for 
                costs which are paid or incurred in connection 
                with the administration of the trust and which 
                would not have been incurred if the property 
                were not held in such trust shall be treated as 
                allowable in arriving at adjusted gross 
                income.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13543. MODIFICATION OF TREATMENT OF S CORPORATION CONVERSIONS TO C 
                    CORPORATIONS.

    (a) Adjustments Attributable to Conversion From S 
Corporation to C Corporation.--Section 481 is amended by adding 
at the end the following new subsection:
    ``(d) Adjustments Attributable to Conversion From S 
Corporation to C Corporation.--
            ``(1) In general.--In the case of an eligible 
        terminated S corporation, any adjustment required by 
        subsection (a)(2) which is attributable to such 
        corporation's revocation described in paragraph 
        (2)(A)(ii) shall be taken into account ratably during 
        the 6-taxable year period beginning with the year of 
        change.
            ``(2) Eligible terminated s corporation.--For 
        purposes of this subsection, the term `eligible 
        terminated S corporation' means any C corporation--
                    ``(A) which--
                            ``(i) was an S corporation on the 
                        day before the date of the enactment of 
                        the Tax Cuts and Jobs Act, and
                            ``(ii) during the 2-year period 
                        beginning on the date of such enactment 
                        makes a revocation of its election 
                        under section 1362(a), and
                    ``(B) the owners of the stock of which, 
                determined on the date such revocation is made, 
                are the same owners (and in identical 
                proportions) as on the date of such 
                enactment.''.
    (b) Cash Distributions Following Post-termination 
Transition Period From S Corporation Status.--Section 1371 is 
amended by adding at the end the following new subsection:
    ``(f) Cash Distributions Following Post-termination 
Transition Period.--In the case of a distribution of money by 
an eligible terminated S corporation (as defined in section 
481(d)) after the post-termination transition period, the 
accumulated adjustments account shall be allocated to such 
distribution, and the distribution shall be chargeable to 
accumulated earnings and profits, in the same ratio as the 
amount of such accumulated adjustments account bears to the 
amount of such accumulated earnings and profits.''.

                          PART VII--EMPLOYMENT

                        Subpart A--Compensation

SEC. 13601. MODIFICATION OF LIMITATION ON EXCESSIVE EMPLOYEE 
                    REMUNERATION.

    (a) Repeal of Performance-based Compensation and Commission 
Exceptions for Limitation on Excessive Employee Remuneration.--
            (1) In general.--Paragraph (4) of section 162(m) is 
        amended by striking subparagraphs (B) and (C) and by 
        redesignating subparagraphs (D), (E), (F), and (G) as 
        subparagraphs (B), (C), (D), and (E), respectively.
            (2) Conforming amendments.--
                    (A) Paragraphs (5)(E) and (6)(D) of section 
                162(m) are each amended by striking 
                ``subparagraphs (B), (C), and (D)'' and 
                inserting ``subparagraph (B)''.
                    (B) Paragraphs (5)(G) and (6)(G) of section 
                162(m) are each amended by striking ``(F) and 
                (G)'' and inserting ``(D) and (E)''.
    (b) Modification of Definition of Covered Employees.--
Paragraph (3) of section 162(m) is amended--
            (1) in subparagraph (A), by striking ``as of the 
        close of the taxable year, such employee is the chief 
        executive officer of the taxpayer or is'' and inserting 
        ``such employee is the principal executive officer or 
        principal financial officer of the taxpayer at any time 
        during the taxable year, or was'',
            (2) in subparagraph (B)--
                    (A) by striking ``4'' and inserting ``3'', 
                and
                    (B) by striking ``(other than the chief 
                executive officer)'' and inserting ``(other 
                than any individual described in subparagraph 
                (A))'', and
            (3) by striking ``or'' at the end of subparagraph 
        (A), by striking the period at the end of subparagraph 
        (B) and inserting ``, or'', and by adding at the end 
        the following:
                    ``(C) was a covered employee of the 
                taxpayer (or any predecessor) for any preceding 
                taxable year beginning after December 31, 
                2016.''.
    (c) Expansion of Applicable Employer.--
            (1) In general.--Section 162(m)(2) is amended to 
        read as follows:
            ``(2) Publicly held corporation.--For purposes of 
        this subsection, the term `publicly held corporation' 
        means any corporation which is an issuer (as defined in 
        section 3 of the Securities Exchange Act of 1934 (15 
        U.S.C. 78c))--
                    ``(A) the securities of which are required 
                to be registered under section 12 of such Act 
                (15 U.S.C. 78l), or
                    ``(B) that is required to file reports 
                under section 15(d) of such Act (15 U.S.C. 
                78o(d)).''.
            (2) Conforming amendment.--Section 162(m)(3), as 
        amended by subsection (b), is amended by adding at the 
        end the following flush sentence:
            ``Such term shall include any employee who would be 
        described in subparagraph (B) if the reporting 
        described in such subparagraph were required as so 
        described.''.
    (d) Special Rule for Remuneration Paid to Beneficiaries, 
etc.--Paragraph (4) of section 162(m), as amended by subsection 
(a), is amended by adding at the end the following new 
subparagraph:
                    ``(F) Special rule for remuneration paid to 
                beneficiaries, etc.--Remuneration shall not 
                fail to be applicable employee remuneration 
                merely because it is includible in the income 
                of, or paid to, a person other than the covered 
                employee, including after the death of the 
                covered employee.''.
    (e) Effective Date.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2017.
            (2) Exception for binding contracts.--The 
        amendments made by this section shall not apply to 
        remuneration which is provided pursuant to a written 
        binding contract which was in effect on November 2, 
        2017, and which was not modified in any material 
        respect on or after such date.

SEC. 13602. EXCISE TAX ON EXCESS TAX-EXEMPT ORGANIZATION EXECUTIVE 
                    COMPENSATION.

    (a) In General.--Subchapter D of chapter 42 is amended by 
adding at the end the following new section:

``SEC. 4960. TAX ON EXCESS TAX-EXEMPT ORGANIZATION EXECUTIVE 
                    COMPENSATION.

    ``(a) Tax Imposed.--There is hereby imposed a tax equal to 
the product of the rate of tax under section 11 and the sum 
of--
            ``(1) so much of the remuneration paid (other than 
        any excess parachute payment) by an applicable tax-
        exempt organization for the taxable year with respect 
        to employment of any covered employee in excess of 
        $1,000,000, plus
            ``(2) any excess parachute payment paid by such an 
        organization to any covered employee.
For purposes of the preceding sentence, remuneration shall be 
treated as paid when there is no substantial risk of forfeiture 
(within the meaning of section 457(f)(3)(B)) of the rights to 
such remuneration.
    ``(b) Liability for Tax.--The employer shall be liable for 
the tax imposed under subsection (a).
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Applicable tax-exempt organization.--The term 
        `applicable tax-exempt organization' means any 
        organization which for the taxable year--
                    ``(A) is exempt from taxation under section 
                501(a),
                    ``(B) is a farmers' cooperative 
                organization described in section 521(b)(1),
                    ``(C) has income excluded from taxation 
                under section 115(1), or
                    ``(D) is a political organization described 
                in section 527(e)(1).
            ``(2) Covered employee.--For purposes of this 
        section, the term `covered employee' means any employee 
        (including any former employee) of an applicable tax-
        exempt organization if the employee--
                    ``(A) is one of the 5 highest compensated 
                employees of the organization for the taxable 
                year, or
                    ``(B) was a covered employee of the 
                organization (or any predecessor) for any 
                preceding taxable year beginning after December 
                31, 2016.
            ``(3) Remuneration.--For purposes of this section:
                    ``(A) In general.--The term `remuneration' 
                means wages (as defined in section 3401(a)), 
                except that such term shall not include any 
                designated Roth contribution (as defined in 
                section 402A(c)) and shall include amounts 
                required to be included in gross income under 
                section 457(f).
                    ``(B) Exception for remuneration for 
                medical services.--The term `remuneration' 
                shall not include the portion of any 
                remuneration paid to a licensed medical 
                professional (including a veterinarian) which 
                is for the performance of medical or veterinary 
                services by such professional.
            ``(4) Remuneration from related organizations.--
                    ``(A) In general.--Remuneration of a 
                covered employee by an applicable tax-exempt 
                organization shall include any remuneration 
                paid with respect to employment of such 
                employee by any related person or governmental 
                entity.
                    ``(B) Related organizations.--A person or 
                governmental entity shall be treated as related 
                to an applicable tax-exempt organization if 
                such person or governmental entity--
                            ``(i) controls, or is controlled 
                        by, the organization,
                            ``(ii) is controlled by one or more 
                        persons which control the organization,
                            ``(iii) is a supported organization 
                        (as defined in section 509(f)(3)) 
                        during the taxable year with respect to 
                        the organization,
                            ``(iv) is a supporting organization 
                        described in section 509(a)(3) during 
                        the taxable year with respect to the 
                        organization, or
                            ``(v) in the case of an 
                        organization which is a voluntary 
                        employees' beneficiary association 
                        described in section 501(c)(9), 
                        establishes, maintains, or makes 
                        contributions to such voluntary 
                        employees' beneficiary association.
                    ``(C) Liability for tax.--In any case in 
                which remuneration from more than one employer 
                is taken into account under this paragraph in 
                determining the tax imposed by subsection (a), 
                each such employer shall be liable for such tax 
                in an amount which bears the same ratio to the 
                total tax determined under subsection (a) with 
                respect to such remuneration as--
                            ``(i) the amount of remuneration 
                        paid by such employer with respect to 
                        such employee, bears to
                            ``(ii) the amount of remuneration 
                        paid by all such employers to such 
                        employee.
            ``(5) Excess parachute payment.--For purposes of 
        determining the tax imposed by subsection (a)(2)--
                    ``(A) In general.--The term `excess 
                parachute payment' means an amount equal to the 
                excess of any parachute payment over the 
                portion of the base amount allocated to such 
                payment.
                    ``(B) Parachute payment.--The term 
                `parachute payment' means any payment in the 
                nature of compensation to (or for the benefit 
                of) a covered employee if--
                            ``(i) such payment is contingent on 
                        such employee's separation from 
                        employment with the employer, and
                            ``(ii) the aggregate present value 
                        of the payments in the nature of 
                        compensation to (or for the benefit of) 
                        such individual which are contingent on 
                        such separation equals or exceeds an 
                        amount equal to 3 times the base 
                        amount.
                    ``(C) Exception.--Such term does not 
                include any payment--
                            ``(i) described in section 
                        280G(b)(6) (relating to exemption for 
                        payments under qualified plans),
                            ``(ii) made under or to an annuity 
                        contract described in section 403(b) or 
                        a plan described in section 457(b),
                            ``(iii) to a licensed medical 
                        professional (including a veterinarian) 
                        to the extent that such payment is for 
                        the performance of medical or 
                        veterinary services by such 
                        professional, or
                            ``(iv) to an individual who is not 
                        a highly compensated employee as 
                        defined in section 414(q).
                    ``(D) Base amount.--Rules similar to the 
                rules of 280G(b)(3) shall apply for purposes of 
                determining the base amount.
                    ``(E) Property transfers; present value.--
                Rules similar to the rules of paragraphs (3) 
                and (4) of section 280G(d) shall apply.
            ``(6) Coordination with deduction limitation.--
        Remuneration the deduction for which is not allowed by 
        reason of section 162(m) shall not be taken into 
        account for purposes of this section.
    ``(d) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to prevent avoidance of the tax 
under this section, including regulations to prevent avoidance 
of such tax through the performance of services other than as 
an employee or by providing compensation through a pass-through 
or other entity to avoid such tax.''.
    (b) Clerical Amendment.--The table of sections for 
subchapter D of chapter 42 is amended by adding at the end the 
following new item:

``Sec. 4960. Tax on excess tax-exempt organization executive 
          compensation.''.

    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13603. TREATMENT OF QUALIFIED EQUITY GRANTS.

    (a) In General.--Section 83 is amended by adding at the end 
the following new subsection:
    ``(i) Qualified Equity Grants.--
            ``(1) In general.--For purposes of this subtitle--
                    ``(A) Timing of inclusion.--If qualified 
                stock is transferred to a qualified employee 
                who makes an election with respect to such 
                stock under this subsection, subsection (a) 
                shall be applied by including the amount 
                determined under such subsection with respect 
                to such stock in income of the employee in the 
                taxable year determined under subparagraph (B) 
                in lieu of the taxable year described in 
                subsection (a).
                    ``(B) Taxable year determined.--The taxable 
                year determined under this subparagraph is the 
                taxable year of the employee which includes the 
                earliest of--
                            ``(i) the first date such qualified 
                        stock becomes transferable (including, 
                        solely for purposes of this clause, 
                        becoming transferable to the employer),
                            ``(ii) the date the employee first 
                        becomes an excluded employee,
                            ``(iii) the first date on which any 
                        stock of the corporation which issued 
                        the qualified stock becomes readily 
                        tradable on an established securities 
                        market (as determined by the Secretary, 
                        but not including any market unless 
                        such market is recognized as an 
                        established securities market by the 
                        Secretary for purposes of a provision 
                        of this title other than this 
                        subsection),
                            ``(iv) the date that is 5 years 
                        after the first date the rights of the 
                        employee in such stock are transferable 
                        or are not subject to a substantial 
                        risk of forfeiture, whichever occurs 
                        earlier, or
                            ``(v) the date on which the 
                        employee revokes (at such time and in 
                        such manner as the Secretary provides) 
                        the election under this subsection with 
                        respect to such stock.
            ``(2) Qualified stock.--
                    ``(A) In general.--For purposes of this 
                subsection, the term `qualified stock' means, 
                with respect to any qualified employee, any 
                stock in a corporation which is the employer of 
                such employee, if--
                            ``(i) such stock is received--
                                    ``(I) in connection with 
                                the exercise of an option, or
                                    ``(II) in settlement of a 
                                restricted stock unit, and
                            ``(ii) such option or restricted 
                        stock unit was granted by the 
                        corporation--
                                    ``(I) in connection with 
                                the performance of services as 
                                an employee, and
                                    ``(II) during a calendar 
                                year in which such corporation 
                                was an eligible corporation.
                    ``(B) Limitation.--The term `qualified 
                stock' shall not include any stock if the 
                employee may sell such stock to, or otherwise 
                receive cash in lieu of stock from, the 
                corporation at the time that the rights of the 
                employee in such stock first become 
                transferable or not subject to a substantial 
                risk of forfeiture.
                    ``(C) Eligible corporation.--For purposes 
                of subparagraph (A)(ii)(II)--
                            ``(i) In general.--The term 
                        `eligible corporation' means, with 
                        respect to any calendar year, any 
                        corporation if--
                                    ``(I) no stock of such 
                                corporation (or any predecessor 
                                of such corporation) is readily 
                                tradable on an established 
                                securities market (as 
                                determined under paragraph 
                                (1)(B)(iii)) during any 
                                preceding calendar year, and
                                    ``(II) such corporation has 
                                a written plan under which, in 
                                such calendar year, not less 
                                than 80 percent of all 
                                employees who provide services 
                                to such corporation in the 
                                United States (or any 
                                possession of the United 
                                States) are granted stock 
                                options, or are granted 
                                restricted stock units, with 
                                the same rights and privileges 
                                to receive qualified stock.
                            ``(ii) Same rights and 
                        privileges.--For purposes of clause 
                        (i)(II)--
                                    ``(I) except as provided in 
                                subclauses (II) and (III), the 
                                determination of rights and 
                                privileges with respect to 
                                stock shall be made in a 
                                similar manner as under section 
                                423(b)(5),
                                    ``(II) employees shall not 
                                fail to be treated as having 
                                the same rights and privileges 
                                to receive qualified stock 
                                solely because the number of 
                                shares available to all 
                                employees is not equal in 
                                amount, so long as the number 
                                of shares available to each 
                                employee is more than a de 
                                minimis amount, and
                                    ``(III) rights and 
                                privileges with respect to the 
                                exercise of an option shall not 
                                be treated as the same as 
                                rights and privileges with 
                                respect to the settlement of a 
                                restricted stock unit.
                            ``(iii) Employee.--For purposes of 
                        clause (i)(II), the term `employee' 
                        shall not include any employee 
                        described in section 4980E(d)(4) or any 
                        excluded employee.
                            ``(iv) Special rule for calendar 
                        years before 2018.--In the case of any 
                        calendar year beginning before January 
                        1, 2018, clause (i)(II) shall be 
                        applied without regard to whether the 
                        rights and privileges with respect to 
                        the qualified stock are the same.
            ``(3) Qualified employee; excluded employee.--For 
        purposes of this subsection--
                    ``(A) In general.--The term `qualified 
                employee' means any individual who--
                            ``(i) is not an excluded employee, 
                        and
                            ``(ii) agrees in the election made 
                        under this subsection to meet such 
                        requirements as are determined by the 
                        Secretary to be necessary to ensure 
                        that the withholding requirements of 
                        the corporation under chapter 24 with 
                        respect to the qualified stock are met.
                    ``(B) Excluded employee.--The term 
                `excluded employee' means, with respect to any 
                corporation, any individual--
                            ``(i) who is a 1-percent owner 
                        (within the meaning of section 
                        416(i)(1)(B)(ii)) at any time during 
                        the calendar year or who was such a 1 
                        percent owner at any time during the 10 
                        preceding calendar years,
                            ``(ii) who is or has been at any 
                        prior time--
                                    ``(I) the chief executive 
                                officer of such corporation or 
                                an individual acting in such a 
                                capacity, or
                                    ``(II) the chief financial 
                                officer of such corporation or 
                                an individual acting in such a 
                                capacity,
                            ``(iii) who bears a relationship 
                        described in section 318(a)(1) to any 
                        individual described in subclause (I) 
                        or (II) of clause (ii), or
                            ``(iv) who is one of the 4 highest 
                        compensated officers of such 
                        corporation for the taxable year, or 
                        was one of the 4 highest compensated 
                        officers of such corporation for any of 
                        the 10 preceding taxable years, 
                        determined with respect to each such 
                        taxable year on the basis of the 
                        shareholder disclosure rules for 
                        compensation under the Securities 
                        Exchange Act of 1934 (as if such rules 
                        applied to such corporation).
            ``(4) Election.--
                    ``(A) Time for making election.--An 
                election with respect to qualified stock shall 
                be made under this subsection no later than 30 
                days after the first date the rights of the 
                employee in such stock are transferable or are 
                not subject to a substantial risk of 
                forfeiture, whichever occurs earlier, and shall 
                be made in a manner similar to the manner in 
                which an election is made under subsection (b).
                    ``(B) Limitations.--No election may be made 
                under this section with respect to any 
                qualified stock if--
                            ``(i) the qualified employee has 
                        made an election under subsection (b) 
                        with respect to such qualified stock,
                            ``(ii) any stock of the corporation 
                        which issued the qualified stock is 
                        readily tradable on an established 
                        securities market (as determined under 
                        paragraph (1)(B)(iii)) at any time 
                        before the election is made, or
                            ``(iii) such corporation purchased 
                        any of its outstanding stock in the 
                        calendar year preceding the calendar 
                        year which includes the first date the 
                        rights of the employee in such stock 
                        are transferable or are not subject to 
                        a substantial risk of forfeiture, 
                        unless--
                                    ``(I) not less than 25 
                                percent of the total dollar 
                                amount of the stock so 
                                purchased is deferral stock, 
                                and
                                    ``(II) the determination of 
                                which individuals from whom 
                                deferral stock is purchased is 
                                made on a reasonable basis.
                    ``(C) Definitions and special rules related 
                to limitation on stock redemptions.--
                            ``(i) Deferral stock.--For purposes 
                        of this paragraph, the term `deferral 
                        stock' means stock with respect to 
                        which an election is in effect under 
                        this subsection.
                            ``(ii) Deferral stock with respect 
                        to any individual not taken into 
                        account if individual holds deferral 
                        stock with longer deferral period.--
                        Stock purchased by a corporation from 
                        any individual shall not be treated as 
                        deferral stock for purposes of 
                        subparagraph (B)(iii) if such 
                        individual (immediately after such 
                        purchase) holds any deferral stock with 
                        respect to which an election has been 
                        in effect under this subsection for a 
                        longer period than the election with 
                        respect to the stock so purchased.
                            ``(iii) Purchase of all outstanding 
                        deferral stock.--The requirements of 
                        subclauses (I) and (II) of subparagraph 
                        (B)(iii) shall be treated as met if the 
                        stock so purchased includes all of the 
                        corporation's outstanding deferral 
                        stock.
                            ``(iv) Reporting.--Any corporation 
                        which has outstanding deferral stock as 
                        of the beginning of any calendar year 
                        and which purchases any of its 
                        outstanding stock during such calendar 
                        year shall include on its return of tax 
                        for the taxable year in which, or with 
                        which, such calendar year ends the 
                        total dollar amount of its outstanding 
                        stock so purchased during such calendar 
                        year and such other information as the 
                        Secretary requires for purposes of 
                        administering this paragraph.
            ``(5) Controlled groups.--For purposes of this 
        subsection, all persons treated as a single employer 
        under section 414(b) shall be treated as 1 corporation.
            ``(6) Notice requirement.--Any corporation which 
        transfers qualified stock to a qualified employee 
        shall, at the time that (or a reasonable period before) 
        an amount attributable to such stock would (but for 
        this subsection) first be includible in the gross 
        income of such employee--
                    ``(A) certify to such employee that such 
                stock is qualified stock, and
                    ``(B) notify such employee--
                            ``(i) that the employee may be 
                        eligible to elect to defer income on 
                        such stock under this subsection, and
                            ``(ii) that, if the employee makes 
                        such an election--
                                    ``(I) the amount of income 
                                recognized at the end of the 
                                deferral period will be based 
                                on the value of the stock at 
                                the time at which the rights of 
                                the employee in such stock 
                                first become transferable or 
                                not subject to substantial risk 
                                of forfeiture, notwithstanding 
                                whether the value of the stock 
                                has declined during the 
                                deferral period,
                                    ``(II) the amount of such 
                                income recognized at the end of 
                                the deferral period will be 
                                subject to withholding under 
                                section 3401(i) at the rate 
                                determined under section 
                                3402(t), and
                                    ``(III) the 
                                responsibilities of the 
                                employee (as determined by the 
                                Secretary under paragraph 
                                (3)(A)(ii)) with respect to 
                                such withholding.
            ``(7) Restricted stock units.--This section (other 
        than this subsection), including any election under 
        subsection (b), shall not apply to restricted stock 
        units.''.
    (b) Withholding.--
            (1) Time of withholding.--Section 3401 is amended 
        by adding at the end the following new subsection:
    ``(i) Qualified Stock for Which an Election Is in Effect 
Under Section 83(i).--For purposes of subsection (a), qualified 
stock (as defined in section 83(i)) with respect to which an 
election is made under section 83(i) shall be treated as 
wages--
            ``(1) received on the earliest date described in 
        section 83(i)(1)(B), and
            ``(2) in an amount equal to the amount included in 
        income under section 83 for the taxable year which 
        includes such date.''.
            (2) Amount of withholding.--Section 3402 is amended 
        by adding at the end the following new subsection:
    ``(t) Rate of Withholding for Certain Stock.--In the case 
of any qualified stock (as defined in section 83(i)(2)) with 
respect to which an election is made under section 83(i)--
            ``(1) the rate of tax under subsection (a) shall 
        not be less than the maximum rate of tax in effect 
        under section 1, and
            ``(2) such stock shall be treated for purposes of 
        section 3501(b) in the same manner as a non-cash fringe 
        benefit.''.
    (c) Coordination With Other Deferred Compensation Rules.--
            (1) Election to apply deferral to statutory 
        options.--
                    (A) Incentive stock options.--Section 
                422(b) is amended by adding at the end the 
                following: ``Such term shall not include any 
                option if an election is made under section 
                83(i) with respect to the stock received in 
                connection with the exercise of such option.''.
                    (B) Employee stock purchase plans.--Section 
                423 is amended--
                            (i) in subsection (b)(5), by 
                        striking ``and'' before ``the plan'' 
                        and by inserting ``, and the rules of 
                        section 83(i) shall apply in 
                        determining which employees have a 
                        right to make an election under such 
                        section'' before the semicolon at the 
                        end, and
                            (ii) by adding at the end the 
                        following new subsection:
    ``(d) Coordination With Qualified Equity Grants.--An option 
for which an election is made under section 83(i) with respect 
to the stock received in connection with its exercise shall not 
be considered as granted pursuant an employee stock purchase 
plan.''.
            (2) Exclusion from definition of nonqualified 
        deferred compensation plan.--Subsection (d) of section 
        409A is amended by adding at the end the following new 
        paragraph:
            ``(7) Treatment of qualified stock.--An arrangement 
        under which an employee may receive qualified stock (as 
        defined in section 83(i)(2)) shall not be treated as a 
        nonqualified deferred compensation plan with respect to 
        such employee solely because of such employee's 
        election, or ability to make an election, to defer 
        recognition of income under section 83(i).''.
    (d) Information Reporting.--Section 6051(a) is amended by 
striking ``and'' at the end of paragraph (14)(B), by striking 
the period at the end of paragraph (15) and inserting a comma, 
and by inserting after paragraph (15) the following new 
paragraphs:
            ``(16) the amount includible in gross income under 
        subparagraph (A) of section 83(i)(1) with respect to an 
        event described in subparagraph (B) of such section 
        which occurs in such calendar year, and
            ``(17) the aggregate amount of income which is 
        being deferred pursuant to elections under section 
        83(i), determined as of the close of the calendar 
        year.''.
    (e) Penalty for Failure of Employer to Provide Notice of 
Tax Consequences.--Section 6652 is amended by adding at the end 
the following new subsection:
    ``(p) Failure to Provide Notice Under Section 83(i).--In 
the case of each failure to provide a notice as required by 
section 83(i)(6), at the time prescribed therefor, unless it is 
shown that such failure is due to reasonable cause and not to 
willful neglect, there shall be paid, on notice and demand of 
the Secretary and in the same manner as tax, by the person 
failing to provide such notice, an amount equal to $100 for 
each such failure, but the total amount imposed on such person 
for all such failures during any calendar year shall not exceed 
$50,000.''.
    (f) Effective Dates.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        stock attributable to options exercised, or restricted 
        stock units settled, after December 31, 2017.
            (2) Requirement to provide notice.--The amendments 
        made by subsection (e) shall apply to failures after 
        December 31, 2017.
    (g) Transition Rule.--Until such time as the Secretary (or 
the Secretary's delegate) issues regulations or other guidance 
for purposes of implementing the requirements of paragraph 
(2)(C)(i)(II) of section 83(i) of the Internal Revenue Code of 
1986 (as added by this section), or the requirements of 
paragraph (6) of such section, a corporation shall be treated 
as being in compliance with such requirements (respectively) if 
such corporation complies with a reasonable good faith 
interpretation of such requirements.

SEC. 13604. INCREASE IN EXCISE TAX RATE FOR STOCK COMPENSATION OF 
                    INSIDERS IN EXPATRIATED CORPORATIONS.

    (a) In General.--Section 4985(a)(1) is amended by striking 
``section 1(h)(1)(C)'' and inserting ``section 1(h)(1)(D)''.
    (b) Effective Date.--The amendment made by this section 
shall apply to corporations first becoming expatriated 
corporations (as defined in section 4985 of the Internal 
Revenue Code of 1986) after the date of enactment of this Act.

                      Subpart B--Retirement Plans

SEC. 13611. REPEAL OF SPECIAL RULE PERMITTING RECHARACTERIZATION OF 
                    ROTH CONVERSIONS.

    (a) In General.--Section 408A(d)(6)(B) is amended by adding 
at the end the following new clause:
                            ``(iii) Conversions.--Subparagraph 
                        (A) shall not apply in the case of a 
                        qualified rollover contribution to 
                        which subsection (d)(3) applies 
                        (including by reason of subparagraph 
                        (C) thereof).''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13612. MODIFICATION OF RULES APPLICABLE TO LENGTH OF SERVICE AWARD 
                    PLANS.

    (a) Maximum Deferral Amount.--Clause (ii) of section 
457(e)(11)(B) is amended by striking ``$3,000'' and inserting 
``$6,000''.
    (b) Cost of Living Adjustment.--Subparagraph (B) of section 
457(e)(11) is amended by adding at the end the following:
                            ``(iii) Cost of living 
                        adjustment.--In the case of taxable 
                        years beginning after December 31, 
                        2017, the Secretary shall adjust the 
                        $6,000 amount under clause (ii) at the 
                        same time and in the same manner as 
                        under section 415(d), except that the 
                        base period shall be the calendar 
                        quarter beginning July 1, 2016, and any 
                        increase under this paragraph that is 
                        not a multiple of $500 shall be rounded 
                        to the next lowest multiple of $500.''.
    (c) Application of Limitation on Accruals.--Subparagraph 
(B) of section 457(e)(11), as amended by subsection (b), is 
amended by adding at the end the following:
                            ``(iv) Special rule for application 
                        of limitation on accruals for certain 
                        plans.--In the case of a plan described 
                        in subparagraph (A)(ii) which is a 
                        defined benefit plan (as defined in 
                        section 414(j)), the limitation under 
                        clause (ii) shall apply to the 
                        actuarial present value of the 
                        aggregate amount of length of service 
                        awards accruing with respect to any 
                        year of service. Such actuarial present 
                        value with respect to any year shall be 
                        calculated using reasonable actuarial 
                        assumptions and methods, assuming 
                        payment will be made under the most 
                        valuable form of payment under the plan 
                        with payment commencing at the later of 
                        the earliest age at which unreduced 
                        benefits are payable under the plan or 
                        the participant's age at the time of 
                        the calculation.''.
    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13613. EXTENDED ROLLOVER PERIOD FOR PLAN LOAN OFFSET AMOUNTS.

    (a) In General.--Paragraph (3) of section 402(c) is amended 
by adding at the end the following new subparagraph:
                    ``(C) Rollover of certain plan loan offset 
                amounts.--
                            ``(i) In general.--In the case of a 
                        qualified plan loan offset amount, 
                        paragraph (1) shall not apply to any 
                        transfer of such amount made after the 
                        due date (including extensions) for 
                        filing the return of tax for the 
                        taxable year in which such amount is 
                        treated as distributed from a qualified 
                        employer plan.
                            ``(ii) Qualified plan loan offset 
                        amount.--For purposes of this 
                        subparagraph, the term `qualified plan 
                        loan offset amount' means a plan loan 
                        offset amount which is treated as 
                        distributed from a qualified employer 
                        plan to a participant or beneficiary 
                        solely by reason of--
                                    ``(I) the termination of 
                                the qualified employer plan, or
                                    ``(II) the failure to meet 
                                the repayment terms of the loan 
                                from such plan because of the 
                                severance from employment of 
                                the participant.
                            ``(iii) Plan loan offset amount.--
                        For purposes of clause (ii), the term 
                        `plan loan offset amount' means the 
                        amount by which the participant's 
                        accrued benefit under the plan is 
                        reduced in order to repay a loan from 
                        the plan.
                            ``(iv) Limitation.--This 
                        subparagraph shall not apply to any 
                        plan loan offset amount unless such 
                        plan loan offset amount relates to a 
                        loan to which section 72(p)(1) does not 
                        apply by reason of section 72(p)(2).
                            ``(v) Qualified employer plan.--For 
                        purposes of this subsection, the term 
                        `qualified employer plan' has the 
                        meaning given such term by section 
                        72(p)(4).''.
    (b) Conforming Amendments.--Section 402(c)(3) is amended--
            (1) by striking ``Transfer must be made within 60 
        days of receipt'' in the heading and inserting ``Time 
        limit on transfers'', and
            (2) by striking ``subparagraph (B)'' in 
        subparagraph (A) and inserting ``subparagraphs (B) and 
        (C)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to plan loan offset amounts which are treated as 
distributed in taxable years beginning after December 31, 2017.

                    PART VIII--EXEMPT ORGANIZATIONS

SEC. 13701. EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE COLLEGES 
                    AND UNIVERSITIES.

    (a) In General.--Chapter 42 is amended by adding at the end 
the following new subchapter:

   ``Subchapter H--Excise Tax Based on Investment Income of Private 
                       Colleges and Universities

``Sec. 4968. Excise tax based on investment income of private colleges 
          and universities.

``SEC. 4968. EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE COLLEGES 
                    AND UNIVERSITIES.

    ``(a) Tax Imposed.--There is hereby imposed on each 
applicable educational institution for the taxable year a tax 
equal to 1.4 percent of the net investment income of such 
institution for the taxable year.
    ``(b) Applicable Educational Institution.--For purposes of 
this subchapter--
            ``(1) In general.--The term `applicable educational 
        institution' means an eligible educational institution 
        (as defined in section 25A(f)(2))--
                    ``(A) which had at least 500 tuition-paying 
                students during the preceding taxable year,
                    ``(B) more than 50 percent of the tuition-
                paying students of which are located in the 
                United States,
                    ``(C) which is not described in the first 
                sentence of section 511(a)(2)(B) (relating to 
                State colleges and universities), and
                    ``(D) the aggregate fair market value of 
                the assets of which at the end of the preceding 
                taxable year (other than those assets which are 
                used directly in carrying out the institution's 
                exempt purpose) is at least $500,000 per 
                student of the institution.
            ``(2) Students.--For purposes of paragraph (1), the 
        number of students of an institution (including for 
        purposes of determining the number of students at a 
        particular location) shall be based on the daily 
        average number of full-time students attending such 
        institution (with part-time students taken into account 
        on a full-time student equivalent basis).
    ``(c) Net Investment Income.--For purposes of this section, 
net investment income shall be determined under rules similar 
to the rules of section 4940(c).
    ``(d) Assets and Net Investment Income of Related 
Organizations.--
            ``(1) In general.--For purposes of subsections 
        (b)(1)(C) and (c), assets and net investment income of 
        any related organization with respect to an educational 
        institution shall be treated as assets and net 
        investment income, respectively, of the educational 
        institution, except that--
                    ``(A) no such amount shall be taken into 
                account with respect to more than 1 educational 
                institution, and
                    ``(B) unless such organization is 
                controlled by such institution or is described 
                in section 509(a)(3) with respect to such 
                institution for the taxable year, assets and 
                net investment income which are not intended or 
                available for the use or benefit of the 
                educational institution shall not be taken into 
                account.
            ``(2) Related organization.--For purposes of this 
        subsection, the term `related organization' means, with 
        respect to an educational institution, any organization 
        which--
                    ``(A) controls, or is controlled by, such 
                institution,
                    ``(B) is controlled by 1 or more persons 
                which also control such institution, or
                    ``(C) is a supported organization (as 
                defined in section 509(f)(3)), or an 
                organization described in section 509(a)(3), 
                during the taxable year with respect to such 
                institution.''.
    (b) Clerical Amendment.--The table of subchapters for 
chapter 42 is amended by adding at the end the following new 
item:

    ``subchapter h--excise tax based on investment income of private 
                      colleges and universities''.

    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 13702. UNRELATED BUSINESS TAXABLE INCOME SEPARATELY COMPUTED FOR 
                    EACH TRADE OR BUSINESS ACTIVITY.

    (a) In General.--Subsection (a) of section 512 is amended 
by adding at the end the following new paragraph:
            ``(6) Special rule for organization with more than 
        1 unrelated trade or business.--In the case of any 
        organization with more than 1 unrelated trade or 
        business--
                    ``(A) unrelated business taxable income, 
                including for purposes of determining any net 
                operating loss deduction, shall be computed 
                separately with respect to each such trade or 
                business and without regard to subsection 
                (b)(12),
                    ``(B) the unrelated business taxable income 
                of such organization shall be the sum of the 
                unrelated business taxable income so computed 
                with respect to each such trade or business, 
                less a specific deduction under subsection 
                (b)(12), and
                    ``(C) for purposes of subparagraph (B), 
                unrelated business taxable income with respect 
                to any such trade or business shall not be less 
                than zero.''.
    (b) Effective Date.--
            (1) In general.--Except to the extent provided in 
        paragraph (2), the amendment made by this section shall 
        apply to taxable years beginning after December 31, 
        2017.
            (2) Carryovers of net operating losses.--If any net 
        operating loss arising in a taxable year beginning 
        before January 1, 2018, is carried over to a taxable 
        year beginning on or after such date--
                    (A) subparagraph (A) of section 512(a)(6) 
                of the Internal Revenue Code of 1986, as added 
                by this Act, shall not apply to such net 
                operating loss, and
                    (B) the unrelated business taxable income 
                of the organization, after the application of 
                subparagraph (B) of such section, shall be 
                reduced by the amount of such net operating 
                loss.

SEC. 13703. UNRELATED BUSINESS TAXABLE INCOME INCREASED BY AMOUNT OF 
                    CERTAIN FRINGE BENEFIT EXPENSES FOR WHICH DEDUCTION 
                    IS DISALLOWED.

    (a) In General.--Section 512(a), as amended by this Act, is 
further amended by adding at the end the following new 
paragraph:
            ``(7) Increase in unrelated business taxable income 
        by disallowed fringe.--Unrelated business taxable 
        income of an organization shall be increased by any 
        amount for which a deduction is not allowable under 
        this chapter by reason of section 274 and which is paid 
        or incurred by such organization for any qualified 
        transportation fringe (as defined in section 132(f)), 
        any parking facility used in connection with qualified 
        parking (as defined in section 132(f)(5)(C)), or any 
        on-premises athletic facility (as defined in section 
        132(j)(4)(B)). The preceding sentence shall not apply 
        to the extent the amount paid or incurred is directly 
        connected with an unrelated trade or business which is 
        regularly carried on by the organization. The Secretary 
        shall issue such regulations or other guidance as may 
        be necessary or appropriate to carry out the purposes 
        of this paragraph, including regulations or other 
        guidance providing for the appropriate allocation of 
        depreciation and other costs with respect to facilities 
        used for parking or for on-premises athletic 
        facilities.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to amounts paid or incurred after December 31, 
2017.

SEC. 13704. REPEAL OF DEDUCTION FOR AMOUNTS PAID IN EXCHANGE FOR 
                    COLLEGE ATHLETIC EVENT SEATING RIGHTS.

    (a) In General.--Section 170(l) is amended--
            (1) by striking paragraph (1) and inserting the 
        following:
            ``(1) In general.--No deduction shall be allowed 
        under this section for any amount described in 
        paragraph (2).'', and
            (2) in paragraph (2)(B), by striking ``such amount 
        would be allowable as a deduction under this section 
        but for the fact that''.
    (b) Effective Date.--The amendments made by this section 
shall apply to contributions made in taxable years beginning 
after December 31, 2017.

SEC. 13705. REPEAL OF SUBSTANTIATION EXCEPTION IN CASE OF CONTRIBUTIONS 
                    REPORTED BY DONEE.

    (a) In General.--Section 170(f)(8) is amended by striking 
subparagraph (D) and by redesignating subparagraph (E) as 
subparagraph (D).
    (b) Effective Date.--The amendments made by this section 
shall apply to contributions made in taxable years beginning 
after December 31, 2016.

                       PART IX--OTHER PROVISIONS

         Subpart A--Craft Beverage Modernization and Tax Reform

SEC. 13801. PRODUCTION PERIOD FOR BEER, WINE, AND DISTILLED SPIRITS.

    (a) In General.--Section 263A(f) is amended--
            (1) by redesignating paragraph (4) as paragraph 
        (5), and
            (2) by inserting after paragraph (3) the following 
        new paragraph:
            ``(4) Exemption for aging process of beer, wine, 
        and distilled spirits.--
                    ``(A) In general.--For purposes of this 
                subsection, the production period shall not 
                include the aging period for--
                            ``(i) beer (as defined in section 
                        5052(a)),
                            ``(ii) wine (as described in 
                        section 5041(a)), or
                            ``(iii) distilled spirits (as 
                        defined in section 5002(a)(8)), except 
                        such spirits that are unfit for use for 
                        beverage purposes.
                    ``(B) Termination.--This paragraph shall 
                not apply to interest costs paid or accrued 
                after December 31, 2019.''.
    (b) Conforming Amendment.--Paragraph (5)(B)(ii) of section 
263A(f), as redesignated by this section, is amended by 
inserting ``except as provided in paragraph (4),'' before 
``ending on the date''.
    (c) Effective Date.--The amendments made by this section 
shall apply to interest costs paid or accrued in calendar years 
beginning after December 31, 2017.

SEC. 13802. REDUCED RATE OF EXCISE TAX ON BEER.

    (a) In General.--Paragraph (1) of section 5051(a) is 
amended to read as follows:
            ``(1) In general.--
                    ``(A) Imposition of tax.--A tax is hereby 
                imposed on all beer brewed or produced, and 
                removed for consumption or sale, within the 
                United States, or imported into the United 
                States. Except as provided in paragraph (2), 
                the rate of such tax shall be the amount 
                determined under this paragraph.
                    ``(B) Rate.--Except as provided in 
                subparagraph (C), the rate of tax shall be $18 
                for per barrel.
                    ``(C) Special rule.--In the case of beer 
                removed after December 31, 2017, and before 
                January 1, 2020, the rate of tax shall be--
                            ``(i) $16 on the first 6,000,000 
                        barrels of beer--
                                    ``(I) brewed by the brewer 
                                and removed during the calendar 
                                year for consumption or sale, 
                                or
                                    ``(II) imported by the 
                                importer into the United States 
                                during the calendar year, and
                            ``(ii) $18 on any barrels of beer 
                        to which clause (i) does not apply.
                    ``(D) Barrel.--For purposes of this 
                section, a barrel shall contain not more than 
                31 gallons of beer, and any tax imposed under 
                this section shall be applied at a like rate 
                for any other quantity or for fractional parts 
                of a barrel.''.
    (b) Reduced Rate for Certain Domestic Production.--
Subparagraph (A) of section 5051(a)(2) is amended--
            (1) in the heading, by striking ``$7 a barrel'', 
        and
            (2) by inserting ``($3.50 in the case of beer 
        removed after December 31, 2017, and before January 1, 
        2020)'' after ``$7''.
    (c) Application of Reduced Tax Rate for Foreign 
Manufacturers and Importers.--Subsection (a) of section 5051 is 
amended--
            (1) in subparagraph (C)(i)(II) of paragraph (1), as 
        amended by subsection (a), by inserting ``but only if 
        the importer is an electing importer under paragraph 
        (4) and the barrels have been assigned to the importer 
        pursuant to such paragraph'' after ``during the 
        calendar year'', and
            (2) by adding at the end the following new 
        paragraph:
            ``(4) Reduced tax rate for foreign manufacturers 
        and importers.--
                    ``(A) In general.--In the case of any 
                barrels of beer which have been brewed or 
                produced outside of the United States and 
                imported into the United States, the rate of 
                tax applicable under clause (i) of paragraph 
                (1)(C) (referred to in this paragraph as the 
                `reduced tax rate') may be assigned by the 
                brewer (provided that the brewer makes an 
                election described in subparagraph (B)(ii)) to 
                any electing importer of such barrels pursuant 
                to the requirements established by the 
                Secretary under subparagraph (B).
                    ``(B) Assignment.--The Secretary shall, 
                through such rules, regulations, and procedures 
                as are determined appropriate, establish 
                procedures for assignment of the reduced tax 
                rate provided under this paragraph, which shall 
                include--
                            ``(i) a limitation to ensure that 
                        the number of barrels of beer for which 
                        the reduced tax rate has been assigned 
                        by a brewer--
                                    ``(I) to any importer does 
                                not exceed the number of 
                                barrels of beer brewed or 
                                produced by such brewer during 
                                the calendar year which were 
                                imported into the United States 
                                by such importer, and
                                    ``(II) to all importers 
                                does not exceed the 6,000,000 
                                barrels to which the reduced 
                                tax rate applies,
                            ``(ii) procedures that allow the 
                        election of a brewer to assign and an 
                        importer to receive the reduced tax 
                        rate provided under this paragraph,
                            ``(iii) requirements that the 
                        brewer provide any information as the 
                        Secretary determines necessary and 
                        appropriate for purposes of carrying 
                        out this paragraph, and
                            ``(iv) procedures that allow for 
                        revocation of eligibility of the brewer 
                        and the importer for the reduced tax 
                        rate provided under this paragraph in 
                        the case of any erroneous or fraudulent 
                        information provided under clause (iii) 
                        which the Secretary deems to be 
                        material to qualifying for such reduced 
                        rate.
                    ``(C) Controlled group.--For purposes of 
                this section, any importer making an election 
                described in subparagraph (B)(ii) shall be 
                deemed to be a member of the controlled group 
                of the brewer, as described under paragraph 
                (5).''.
    (d) Controlled Group and Single Taxpayer Rules.--Subsection 
(a) of section 5051, as amended by this section, is amended--
            (1) in paragraph (2)--
                    (A) by striking subparagraph (B), and
                    (B) by redesignating subparagraph (C) as 
                subparagraph (B), and
            (2) by adding at the end the following new 
        paragraph:
            ``(5) Controlled group and single taxpayer rules.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), in the case of a controlled 
                group, the 6,000,000 barrel quantity specified 
                in paragraph (1)(C)(i) and the 2,000,000 barrel 
                quantity specified in paragraph (2)(A) shall be 
                applied to the controlled group, and the 
                6,000,000 barrel quantity specified in 
                paragraph (1)(C)(i) and the 60,000 barrel 
                quantity specified in paragraph (2)(A) shall be 
                apportioned among the brewers who are members 
                of such group in such manner as the Secretary 
                or their delegate shall by regulations 
                prescribe. For purposes of the preceding 
                sentence, the term `controlled group' has the 
                meaning assigned to it by subsection (a) of 
                section 1563, except that for such purposes the 
                phrase `more than 50 percent' shall be 
                substituted for the phrase `at least 80 
                percent' in each place it appears in such 
                subsection. Under regulations prescribed by the 
                Secretary, principles similar to the principles 
                of the preceding two sentences shall be applied 
                to a group of brewers under common control 
                where one or more of the brewers is not a 
                corporation.
                    ``(B) Foreign manufacturers and 
                importers.--For purposes of paragraph (4), in 
                the case of a controlled group, the 6,000,000 
                barrel quantity specified in paragraph 
                (1)(C)(i) shall be applied to the controlled 
                group and apportioned among the members of such 
                group in such manner as the Secretary shall by 
                regulations prescribe. For purposes of the 
                preceding sentence, the term `controlled group' 
                has the meaning given such term under 
                subparagraph (A). Under regulations prescribed 
                by the Secretary, principles similar to the 
                principles of the preceding two sentences shall 
                be applied to a group of brewers under common 
                control where one or more of the brewers is not 
                a corporation.
                    ``(C) Single taxpayer.--Pursuant to rules 
                issued by the Secretary, two or more entities 
                (whether or not under common control) that 
                produce beer marketed under a similar brand, 
                license, franchise, or other arrangement shall 
                be treated as a single taxpayer for purposes of 
                the application of this subsection.''.
    (e) Effective Date.--The amendments made by this section 
shall apply to beer removed after December 31, 2017.

SEC. 13803. TRANSFER OF BEER BETWEEN BONDED FACILITIES.

    (a) In General.--Section 5414 is amended--
            (1) by striking ``Beer may be removed'' and 
        inserting ``(a) In General--Beer may be removed'', and
            (2) by adding at the end the following:
    ``(b) Transfer of Beer Between Bonded Facilities.--
            ``(1) In general.--Beer may be removed from one 
        bonded brewery to another bonded brewery, without 
        payment of tax, and may be mingled with beer at the 
        receiving brewery, subject to such conditions, 
        including payment of the tax, and in such containers, 
        as the Secretary by regulations shall prescribe, which 
        shall include--
                    ``(A) any removal from one brewery to 
                another brewery belonging to the same brewer,
                    ``(B) any removal from a brewery owned by 
                one corporation to a brewery owned by another 
                corporation when--
                            ``(i) one such corporation owns the 
                        controlling interest in the other such 
                        corporation, or
                            ``(ii) the controlling interest in 
                        each such corporation is owned by the 
                        same person or persons, and
                    ``(C) any removal from one brewery to 
                another brewery when--
                            ``(i) the proprietors of 
                        transferring and receiving premises are 
                        independent of each other and neither 
                        has a proprietary interest, directly or 
                        indirectly, in the business of the 
                        other, and
                            ``(ii) the transferor has divested 
                        itself of all interest in the beer so 
                        transferred and the transferee has 
                        accepted responsibility for payment of 
                        the tax.
            ``(2) Transfer of liability for tax.--For purposes 
        of paragraph (1)(C), such relief from liability shall 
        be effective from the time of removal from the 
        transferor's bonded premises, or from the time of 
        divestment of interest, whichever is later.
            ``(3) Termination.--This subsection shall not apply 
        to any calendar quarter beginning after December 31, 
        2019.''.
    (b) Removal From Brewery by Pipeline.--Section 5412 is 
amended by inserting ``pursuant to section 5414 or'' before 
``by pipeline''.
    (c) Effective Date.--The amendments made by this section 
shall apply to any calendar quarters beginning after December 
31, 2017.

SEC. 13804. REDUCED RATE OF EXCISE TAX ON CERTAIN WINE.

    (a) In General.--Section 5041(c) is amended by adding at 
the end the following new paragraph:
            ``(8) Special rule for 2018 and 2019.--
                    ``(A) In general.--In the case of wine 
                removed after December 31, 2017, and before 
                January 1, 2020, paragraphs (1) and (2) shall 
                not apply and there shall be allowed as a 
                credit against any tax imposed by this title 
                (other than chapters 2, 21, and 22) an amount 
                equal to the sum of--
                            ``(i) $1 per wine gallon on the 
                        first 30,000 wine gallons of wine, plus
                            ``(ii) 90 cents per wine gallon on 
                        the first 100,000 wine gallons of wine 
                        to which clause (i) does not apply, 
                        plus
                            ``(iii) 53.5 cents per wine gallon 
                        on the first 620,000 wine gallons of 
                        wine to which clauses (i) and (ii) do 
                        not apply,
                which are produced by the producer and removed 
                during the calendar year for consumption or 
                sale, or which are imported by the importer 
                into the United States during the calendar 
                year.
                    ``(B) Adjustment of credit for hard 
                cider.--In the case of wine described in 
                subsection (b)(6), subparagraph (A) of this 
                paragraph shall be applied--
                            ``(i) in clause (i) of such 
                        subparagraph, by substituting `6.2 
                        cents' for `$1',
                            ``(ii) in clause (ii) of such 
                        subparagraph, by substituting `5.6 
                        cents' for `90 cents', and
                            ``(iii) in clause (iii) of such 
                        subparagraph, by substituting `3.3 
                        cents' for `53.5 cents'.'',
    (b) Controlled Group and Single Taxpayer Rules.--Paragraph 
(4) of section 5041(c) is amended by striking ``section 
5051(a)(2)(B)'' and inserting ``section 5051(a)(5)''.
    (c) Allowance of Credit for Foreign Manufacturers and 
Importers.--Subsection (c) of section 5041, as amended by 
subsection (a), is amended--
            (1) in subparagraph (A) of paragraph (8), by 
        inserting ``but only if the importer is an electing 
        importer under paragraph (9) and the wine gallons of 
        wine have been assigned to the importer pursuant to 
        such paragraph'' after ``into the United States during 
        the calendar year'', and
            (2) by adding at the end the following new 
        paragraph:
            ``(9) Allowance of credit for foreign manufacturers 
        and importers.--
                    ``(A) In general.--In the case of any wine 
                gallons of wine which have been produced 
                outside of the United States and imported into 
                the United States, the credit allowable under 
                paragraph (8) (referred to in this paragraph as 
                the `tax credit') may be assigned by the person 
                who produced such wine (referred to in this 
                paragraph as the `foreign producer'), provided 
                that such person makes an election described in 
                subparagraph (B)(ii), to any electing importer 
                of such wine gallons pursuant to the 
                requirements established by the Secretary under 
                subparagraph (B).
                    ``(B) Assignment.--The Secretary shall, 
                through such rules, regulations, and procedures 
                as are determined appropriate, establish 
                procedures for assignment of the tax credit 
                provided under this paragraph, which shall 
                include--
                            ``(i) a limitation to ensure that 
                        the number of wine gallons of wine for 
                        which the tax credit has been assigned 
                        by a foreign producer--
                                    ``(I) to any importer does 
                                not exceed the number of wine 
                                gallons of wine produced by 
                                such foreign producer during 
                                the calendar year which were 
                                imported into the United States 
                                by such importer, and
                                    ``(II) to all importers 
                                does not exceed the 750,000 
                                wine gallons of wine to which 
                                the tax credit applies,
                            ``(ii) procedures that allow the 
                        election of a foreign producer to 
                        assign and an importer to receive the 
                        tax credit provided under this 
                        paragraph,
                            ``(iii) requirements that the 
                        foreign producer provide any 
                        information as the Secretary determines 
                        necessary and appropriate for purposes 
                        of carrying out this paragraph, and
                            ``(iv) procedures that allow for 
                        revocation of eligibility of the 
                        foreign producer and the importer for 
                        the tax credit provided under this 
                        paragraph in the case of any erroneous 
                        or fraudulent information provided 
                        under clause (iii) which the Secretary 
                        deems to be material to qualifying for 
                        such credit.
                    ``(C) Controlled group.--For purposes of 
                this section, any importer making an election 
                described in subparagraph (B)(ii) shall be 
                deemed to be a member of the controlled group 
                of the foreign producer, as described under 
                paragraph (4).''.
    (d) Effective Date.--The amendments made by this section 
shall apply to wine removed after December 31, 2017.

SEC. 13805. ADJUSTMENT OF ALCOHOL CONTENT LEVEL FOR APPLICATION OF 
                    EXCISE TAX RATES.

    (a) In General.--Paragraphs (1) and (2) of section 5041(b) 
are each amended by inserting ``(16 percent in the case of wine 
removed after December 31, 2017, and before January 1, 2020'' 
after ``14 percent''.
    (b) Effective Date.--The amendments made by this section 
shall apply to wine removed after December 31, 2017.

SEC. 13806. DEFINITION OF MEAD AND LOW ALCOHOL BY VOLUME WINE.

    (a) In General.--Section 5041 is amended--
            (1) in subsection (a), by striking ``Still wines'' 
        and inserting ``Subject to subsection (h), still 
        wines'', and
            (2) by adding at the end the following new 
        subsection:
    ``(h) Mead and Low Alcohol by Volume Wine.--
            ``(1) In general.--For purposes of subsections (a) 
        and (b)(1), mead and low alcohol by volume wine shall 
        be deemed to be still wines containing not more than 16 
        percent of alcohol by volume.
            ``(2) Definitions.--
                    ``(A) Mead.--For purposes of this section, 
                the term `mead' means a wine--
                            ``(i) containing not more than 0.64 
                        gram of carbon dioxide per hundred 
                        milliliters of wine, except that the 
                        Secretary shall by regulations 
                        prescribe such tolerances to this 
                        limitation as may be reasonably 
                        necessary in good commercial practice,
                            ``(ii) which is derived solely from 
                        honey and water,
                            ``(iii) which contains no fruit 
                        product or fruit flavoring, and
                            ``(iv) which contains less than 8.5 
                        percent alcohol by volume.
                    ``(B) Low alcohol by volume wine.--For 
                purposes of this section, the term `low alcohol 
                by volume wine' means a wine--
                            ``(i) containing not more than 0.64 
                        gram of carbon dioxide per hundred 
                        milliliters of wine, except that the 
                        Secretary shall by regulations 
                        prescribe such tolerances to this 
                        limitation as may be reasonably 
                        necessary in good commercial practice,
                            ``(ii) which is derived--
                                    ``(I) primarily from 
                                grapes, or
                                    ``(II) from grape juice 
                                concentrate and water,
                            ``(iii) which contains no fruit 
                        product or fruit flavoring other than 
                        grape, and
                            ``(iv) which contains less than 8.5 
                        percent alcohol by volume.
            ``(3) Termination.--This subsection shall not apply 
        to wine removed after December 31, 2019.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to wine removed after December 31, 2017.

SEC. 13807. REDUCED RATE OF EXCISE TAX ON CERTAIN DISTILLED SPIRITS.

    (a) In General.--Section 5001 is amended by redesignating 
subsection (c) as subsection (d) and by inserting after 
subsection (b) the following new subsection:
    ``(c) Reduced Rate for 2018 and 2019.--
            ``(1) In general.--In the case of a distilled 
        spirits operation, the otherwise applicable tax rate 
        under subsection (a)(1) shall be--
                    ``(A) $2.70 per proof gallon on the first 
                100,000 proof gallons of distilled spirits, and
                    ``(B) $13.34 per proof gallon on the first 
                22,130,000 of proof gallons of distilled 
                spirits to which subparagraph (A) does not 
                apply,
        which have been distilled or processed by such 
        operation and removed during the calendar year for 
        consumption or sale, or which have been imported by the 
        importer into the United States during the calendar 
        year.
            ``(2) Controlled groups.--
                    ``(A) In general.--In the case of a 
                controlled group, the proof gallon quantities 
                specified under subparagraphs (A) and (B) of 
                paragraph (1) shall be applied to such group 
                and apportioned among the members of such group 
                in such manner as the Secretary or their 
                delegate shall by regulations prescribe.
                    ``(B) Definition.--For purposes of 
                subparagraph (A), the term `controlled group' 
                shall have the meaning given such term by 
                subsection (a) of section 1563, except that 
                `more than 50 percent' shall be substituted for 
                `at least 80 percent' each place it appears in 
                such subsection.
                    ``(C) Rules for non-corporations.--Under 
                regulations prescribed by the Secretary, 
                principles similar to the principles of 
                subparagraphs (A) and (B) shall be applied to a 
                group under common control where one or more of 
                the persons is not a corporation.
                    ``(D) Single taxpayer.--Pursuant to rules 
                issued by the Secretary, two or more entities 
                (whether or not under common control) that 
                produce distilled spirits marketed under a 
                similar brand, license, franchise, or other 
                arrangement shall be treated as a single 
                taxpayer for purposes of the application of 
                this subsection.
            ``(3) Termination.--This subsection shall not apply 
        to distilled spirits removed after December 31, 
        2019.''.
    (b) Conforming Amendment.--Section 7652(f)(2) is amended by 
striking ``section 5001(a)(1)'' and inserting ``subsection 
(a)(1) of section 5001, determined as if subsection (c)(1) of 
such section did not apply''.
    (c) Application of Reduced Tax Rate for Foreign 
Manufacturers and Importers.--Subsection (c) of section 5001, 
as added by subsection (a), is amended--
            (1) in paragraph (1), by inserting ``but only if 
        the importer is an electing importer under paragraph 
        (3) and the proof gallons of distilled spirits have 
        been assigned to the importer pursuant to such 
        paragraph'' after ``into the United States during the 
        calendar year'', and
            (2) by redesignating paragraph (3) as paragraph (4) 
        and by inserting after paragraph (2) the following new 
        paragraph:
            ``(3) Reduced tax rate for foreign manufacturers 
        and importers.--
                    ``(A) In general.--In the case of any proof 
                gallons of distilled spirits which have been 
                produced outside of the United States and 
                imported into the United States, the rate of 
                tax applicable under paragraph (1) (referred to 
                in this paragraph as the `reduced tax rate') 
                may be assigned by the distilled spirits 
                operation (provided that such operation makes 
                an election described in subparagraph (B)(ii)) 
                to any electing importer of such proof gallons 
                pursuant to the requirements established by the 
                Secretary under subparagraph (B).
                    ``(B) Assignment.--The Secretary shall, 
                through such rules, regulations, and procedures 
                as are determined appropriate, establish 
                procedures for assignment of the reduced tax 
                rate provided under this paragraph, which shall 
                include--
                            ``(i) a limitation to ensure that 
                        the number of proof gallons of 
                        distilled spirits for which the reduced 
                        tax rate has been assigned by a 
                        distilled spirits operation--
                                    ``(I) to any importer does 
                                not exceed the number of proof 
                                gallons produced by such 
                                operation during the calendar 
                                year which were imported into 
                                the United States by such 
                                importer, and
                                    ``(II) to all importers 
                                does not exceed the 22,230,000 
                                proof gallons of distilled 
                                spirits to which the reduced 
                                tax rate applies,
                            ``(ii) procedures that allow the 
                        election of a distilled spirits 
                        operation to assign and an importer to 
                        receive the reduced tax rate provided 
                        under this paragraph,
                            ``(iii) requirements that the 
                        distilled spirits operation provide any 
                        information as the Secretary determines 
                        necessary and appropriate for purposes 
                        of carrying out this paragraph, and
                            ``(iv) procedures that allow for 
                        revocation of eligibility of the 
                        distilled spirits operation and the 
                        importer for the reduced tax rate 
                        provided under this paragraph in the 
                        case of any erroneous or fraudulent 
                        information provided under clause (iii) 
                        which the Secretary deems to be 
                        material to qualifying for such reduced 
                        rate.
                    ``(C) Controlled group.--
                            ``(i) In general.--For purposes of 
                        this section, any importer making an 
                        election described in subparagraph 
                        (B)(ii) shall be deemed to be a member 
                        of the controlled group of the 
                        distilled spirits operation, as 
                        described under paragraph (2).
                            ``(ii) Apportionment.--For purposes 
                        of this paragraph, in the case of a 
                        controlled group, rules similar to 
                        section 5051(a)(5)(B) shall apply.''.
    (d) Effective Date.--The amendments made by this section 
shall apply to distilled spirits removed after December 31, 
2017.

SEC. 13808. BULK DISTILLED SPIRITS.

    (a) In General.--Section 5212 is amended by adding at the 
end the following sentence: ``In the case of distilled spirits 
transferred in bond after December 31, 2017, and before January 
1, 2020, this section shall be applied without regard to 
whether distilled spirits are bulk distilled spirits.''.
    (b) Effective Date.--The amendments made by this section 
shall apply distilled spirits transferred in bond after 
December 31, 2017.

                  Subpart B--Miscellaneous Provisions

SEC. 13821. MODIFICATION OF TAX TREATMENT OF ALASKA NATIVE CORPORATIONS 
                    AND SETTLEMENT TRUSTS.

    (a) Exclusion for ANCSA Payments Assigned to Alaska Native 
Settlement Trusts.--
            (1) In general.--Part III of subchapter B of 
        chapter 1 is amended by inserting before section 140 
        the following new section:

``SEC. 139G. ASSIGNMENTS TO ALASKA NATIVE SETTLEMENT TRUSTS.

    ``(a) In General.--In the case of a Native Corporation, 
gross income shall not include the value of any payments that 
would otherwise be made, or treated as being made, to such 
Native Corporation pursuant to, or as required by, any 
provision of the Alaska Native Claims Settlement Act (43 U.S.C. 
1601 et seq.), including any payment that would otherwise be 
made to a Village Corporation pursuant to section 7(j) of the 
Alaska Native Claims Settlement Act (43 U.S.C. 1606(j)), 
provided that any such payments--
            ``(1) are assigned in writing to a Settlement 
        Trust, and
            ``(2) were not received by such Native Corporation 
        prior to the assignment described in paragraph (1).
    ``(b) Inclusion in Gross Income.--In the case of a 
Settlement Trust which has been assigned payments described in 
subsection (a), gross income shall include such payments when 
received by such Settlement Trust pursuant to the assignment 
and shall have the same character as if such payments were 
received by the Native Corporation.
    ``(c) Amount and Scope of Assignment.--The amount and scope 
of any assignment under subsection (a) shall be described with 
reasonable particularity and may either be in a percentage of 
one or more such payments or in a fixed dollar amount.
    ``(d) Duration of Assignment; Revocability.--Any assignment 
under subsection (a) shall specify--
            ``(1) a duration either in perpetuity or for a 
        period of time, and
            ``(2) whether such assignment is revocable.
    ``(e) Prohibition on Deduction.--Notwithstanding section 
247, no deduction shall be allowed to a Native Corporation for 
purposes of any amounts described in subsection (a).
    ``(f) Definitions.--For purposes of this section, the terms 
`Native Corporation' and `Settlement Trust' have the same 
meaning given such terms under section 646(h).''.
            (2) Conforming amendment.--The table of sections 
        for part III of subchapter B of chapter 1 is amended by 
        inserting before the item relating to section 140 the 
        following new item:

``Sec. 139G. Assignments to Alaska Native Settlement Trusts.''.

            (3) Effective date.--The amendments made by this 
        subsection shall apply to taxable years beginning after 
        December 31, 2016.
    (b) Deduction of Contributions to Alaska Native Settlement 
Trusts.--
            (1) In general.--Part VIII of subchapter B of 
        chapter 1 is amended by inserting before section 248 
        the following new section:

``SEC. 247. CONTRIBUTIONS TO ALASKA NATIVE SETTLEMENT TRUSTS.

    ``(a) In General.--In the case of a Native Corporation, 
there shall be allowed a deduction for any contributions made 
by such Native Corporation to a Settlement Trust (regardless of 
whether an election under section 646 is in effect for such 
Settlement Trust) for which the Native Corporation has made an 
annual election under subsection (e).
    ``(b) Amount of Deduction.--The amount of the deduction 
under subsection (a) shall be equal to--
            ``(1) in the case of a cash contribution 
        (regardless of the method of payment, including 
        currency, coins, money order, or check), the amount of 
        such contribution, or
            ``(2) in the case of a contribution not described 
        in paragraph (1), the lesser of--
                    ``(A) the Native Corporation's adjusted 
                basis in the property contributed, or
                    ``(B) the fair market value of the property 
                contributed.
    ``(c) Limitation and Carryover.--
            ``(1) In general.--Subject to paragraph (2), the 
        deduction allowed under subsection (a) for any taxable 
        year shall not exceed the taxable income (as determined 
        without regard to such deduction) of the Native 
        Corporation for the taxable year in which the 
        contribution was made.
            ``(2) Carryover.--If the aggregate amount of 
        contributions described in subsection (a) for any 
        taxable year exceeds the limitation under paragraph 
        (1), such excess shall be treated as a contribution 
        described in subsection (a) in each of the 15 
        succeeding years in order of time.
    ``(d) Definitions.--For purposes of this section, the terms 
`Native Corporation' and `Settlement Trust' have the same 
meaning given such terms under section 646(h).
    ``(e) Manner of Making Election.--
            ``(1) In general.--For each taxable year, a Native 
        Corporation may elect to have this section apply for 
        such taxable year on the income tax return or an 
        amendment or supplement to the return of the Native 
        Corporation, with such election to have effect solely 
        for such taxable year.
            ``(2) Revocation.--Any election made by a Native 
        Corporation pursuant to this subsection may be revoked 
        pursuant to a timely filed amendment or supplement to 
        the income tax return of such Native Corporation.
    ``(f) Additional Rules.--
            ``(1) Earnings and profits.--Notwithstanding 
        section 646(d)(2), in the case of a Native Corporation 
        which claims a deduction under this section for any 
        taxable year, the earnings and profits of such Native 
        Corporation for such taxable year shall be reduced by 
        the amount of such deduction.
            ``(2) Gain or loss.--No gain or loss shall be 
        recognized by the Native Corporation with respect to a 
        contribution of property for which a deduction is 
        allowed under this section.
            ``(3) Income.--Subject to subsection (g), a 
        Settlement Trust shall include in income the amount of 
        any deduction allowed under this section in the taxable 
        year in which the Settlement Trust actually receives 
        such contribution.
            ``(4) Period.--The holding period under section 
        1223 of the Settlement Trust shall include the period 
        the property was held by the Native Corporation.
            ``(5) Basis.--The basis that a Settlement Trust has 
        for which a deduction is allowed under this section 
        shall be equal to the lesser of--
                    ``(A) the adjusted basis of the Native 
                Corporation in such property immediately before 
                such contribution, or
                    ``(B) the fair market value of the property 
                immediately before such contribution.
            ``(6) Prohibition.--No deduction shall be allowed 
        under this section with respect to any contributions 
        made to a Settlement Trust which are in violation of 
        subsection (a)(2) or (c)(2) of section 39 of the Alaska 
        Native Claims Settlement Act (43 U.S.C. 1629e).
    ``(g) Election by Settlement Trust to Defer Income 
Recognition.--
            ``(1) In general.--In the case of a contribution 
        which consists of property other than cash, a 
        Settlement Trust may elect to defer recognition of any 
        income related to such property until the sale or 
        exchange of such property, in whole or in part, by the 
        Settlement Trust.
            ``(2) Treatment.--In the case of property described 
        in paragraph (1), any income or gain realized on the 
        sale or exchange of such property shall be treated as--
                    ``(A) for such amount of the income or gain 
                as is equal to or less than the amount of 
                income which would be included in income at the 
                time of contribution under subsection (f)(3) 
                but for the taxpayer's election under this 
                subsection, ordinary income, and
                    ``(B) for any amounts of the income or gain 
                which are in excess of the amount of income 
                which would be included in income at the time 
                of contribution under subsection (f)(3) but for 
                the taxpayer's election under this subsection, 
                having the same character as if this subsection 
                did not apply.
            ``(3) Election.--
                    ``(A) In general.--For each taxable year, a 
                Settlement Trust may elect to apply this 
                subsection for any property described in 
                paragraph (1) which was contributed during such 
                year. Any property to which the election 
                applies shall be identified and described with 
                reasonable particularity on the income tax 
                return or an amendment or supplement to the 
                return of the Settlement Trust, with such 
                election to have effect solely for such taxable 
                year.
                    ``(B) Revocation.--Any election made by a 
                Settlement Trust pursuant to this subsection 
                may be revoked pursuant to a timely filed 
                amendment or supplement to the income tax 
                return of such Settlement Trust.
                    ``(C) Certain dispositions.--
                            ``(i) In general.--In the case of 
                        any property for which an election is 
                        in effect under this subsection and 
                        which is disposed of within the first 
                        taxable year subsequent to the taxable 
                        year in which such property was 
                        contributed to the Settlement Trust--
                                    ``(I) this section shall be 
                                applied as if the election 
                                under this subsection had not 
                                been made,
                                    ``(II) any income or gain 
                                which would have been included 
                                in the year of contribution 
                                under subsection (f)(3) but for 
                                the taxpayer's election under 
                                this subsection shall be 
                                included in income for the 
                                taxable year of such 
                                contribution, and
                                    ``(III) the Settlement 
                                Trust shall pay any increase in 
                                tax resulting from such 
                                inclusion, including any 
                                applicable interest, and 
                                increased by 10 percent of the 
                                amount of such increase with 
                                interest.
                            ``(ii) Assessment.--Notwithstanding 
                        section 6501(a), any amount described 
                        in subclause (III) of clause (i) may be 
                        assessed, or a proceeding in court with 
                        respect to such amount may be initiated 
                        without assessment, within 4 years 
                        after the date on which the return 
                        making the election under this 
                        subsection for such property was 
                        filed.''.
            (2) Conforming amendment.--The table of sections 
        for part VIII of subchapter B of chapter 1 is amended 
        by inserting before the item relating to section 248 
        the following new item:

``Sec. 247. Contributions to Alaska Native Settlement Trusts.''.

            (3) Effective date.--
                    (A) In general.--The amendments made by 
                this subsection shall apply to taxable years 
                for which the period of limitation on refund or 
                credit under section 6511 of the Internal 
                Revenue Code of 1986 has not expired.
                    (B) One-year waiver of statute of 
                limitations.--If the period of limitation on a 
                credit or refund resulting from the amendments 
                made by paragraph (1) expires before the end of 
                the 1-year period beginning on the date of the 
                enactment of this Act, refund or credit of such 
                overpayment (to the extent attributable to such 
                amendments) may, nevertheless, be made or 
                allowed if claim therefor is filed before the 
                close of such 1-year period.
    (c) Information Reporting for Deductible Contributions to 
Alaska Native Settlement Trusts.--
            (1) In general.--Section 6039H is amended--
                    (A) in the heading, by striking 
                ``sponsoring'', and
                    (B) by adding at the end the following new 
                subsection:
    ``(e) Deductible Contributions by Native Corporations to 
Alaska Native Settlement Trusts.--
            ``(1) In general.--Any Native Corporation (as 
        defined in subsection (m) of section 3 of the Alaska 
        Native Claims Settlement Act (43 U.S.C. 1602(m))) which 
        has made a contribution to a Settlement Trust (as 
        defined in subsection (t) of such section) to which an 
        election under subsection (e) of section 247 applies 
        shall provide such Settlement Trust with a statement 
        regarding such election not later than January 31 of 
        the calendar year subsequent to the calendar year in 
        which the contribution was made.
            ``(2) Content of statement.--The statement 
        described in paragraph (1) shall include--
                    ``(A) the total amount of contributions to 
                which the election under subsection (e) of 
                section 247 applies,
                    ``(B) for each contribution, whether such 
                contribution was in cash,
                    ``(C) for each contribution which consists 
                of property other than cash, the date that such 
                property was acquired by the Native Corporation 
                and the adjusted basis and fair market value of 
                such property on the date such property was 
                contributed to the Settlement Trust,
                    ``(D) the date on which each contribution 
                was made to the Settlement Trust, and
                    ``(E) such information as the Secretary 
                determines to be necessary or appropriate for 
                the identification of each contribution and the 
                accurate inclusion of income relating to such 
                contributions by the Settlement Trust.''.
            (2) Conforming amendment.--The item relating to 
        section 6039H in the table of sections for subpart A of 
        part III of subchapter A of chapter 61 is amended to 
        read as follows:

``Sec. 6039H. Information With Respect to Alaska Native Settlement 
          Trusts and Native Corporations.''.

            (3) Effective date.--The amendments made by this 
        subsection shall apply to taxable years beginning after 
        December 31, 2016.

SEC. 13822. AMOUNTS PAID FOR AIRCRAFT MANAGEMENT SERVICES.

    (a) In General.--Subsection (e) of section 4261 is amended 
by adding at the end the following new paragraph:
            ``(5) Amounts paid for aircraft management 
        services.--
                    ``(A) In general.--No tax shall be imposed 
                by this section or section 4271 on any amounts 
                paid by an aircraft owner for aircraft 
                management services related to--
                            ``(i) maintenance and support of 
                        the aircraft owner's aircraft, or
                            ``(ii) flights on the aircraft 
                        owner's aircraft.
                    ``(B) Aircraft management services.--For 
                purposes of subparagraph (A), the term 
                `aircraft management services' includes--
                            ``(i) assisting an aircraft owner 
                        with administrative and support 
                        services, such as scheduling, flight 
                        planning, and weather forecasting,
                            ``(ii) obtaining insurance,
                            ``(iii) maintenance, storage and 
                        fueling of aircraft,
                            ``(iv) hiring, training, and 
                        provision of pilots and crew,
                            ``(v) establishing and complying 
                        with safety standards, and
                            ``(vi) such other services as are 
                        necessary to support flights operated 
                        by an aircraft owner.
                    ``(C) Lessee treated as aircraft owner.--
                            ``(i) In general.--For purposes of 
                        this paragraph, the term `aircraft 
                        owner' includes a person who leases the 
                        aircraft other than under a 
                        disqualified lease.
                            ``(ii) Disqualified lease.--For 
                        purposes of clause (i), the term 
                        `disqualified lease' means a lease from 
                        a person providing aircraft management 
                        services with respect to such aircraft 
                        (or a related person (within the 
                        meaning of section 465(b)(3)(C)) to the 
                        person providing such services), if 
                        such lease is for a term of 31 days or 
                        less.
                    ``(D) Pro rata allocation.--In the case of 
                amounts paid to any person which (but for this 
                subsection) are subject to the tax imposed by 
                subsection (a), a portion of which consists of 
                amounts described in subparagraph (A), this 
                paragraph shall apply on a pro rata basis only 
                to the portion which consists of amounts 
                described in such subparagraph.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to amounts paid after the date of the enactment of 
this Act.

SEC. 13823. OPPORTUNITY ZONES.

    (a) In General.--Chapter 1 is amended by adding at the end 
the following:

                   ``Subchapter Z--Opportunity Zones

``Sec. 1400Z-1. Designation.
``Sec. 1400Z-2. Special rules for capital gains invested in opportunity 
          zones.

``SEC. 1400Z-1. DESIGNATION.

    ``(a) Qualified Opportunity Zone Defined.--For the purposes 
of this subchapter, the term `qualified opportunity zone' means 
a population census tract that is a low-income community that 
is designated as a qualified opportunity zone.
    ``(b) Designation.--
            ``(1) In general.--For purposes of subsection (a), 
        a population census tract that is a low-income 
        community is designated as a qualified opportunity zone 
        if--
                    ``(A) not later than the end of the 
                determination period, the chief executive 
                officer of the State in which the tract is 
                located--
                            ``(i) nominates the tract for 
                        designation as a qualified opportunity 
                        zone, and
                            ``(ii) notifies the Secretary in 
                        writing of such nomination, and
                    ``(B) the Secretary certifies such 
                nomination and designates such tract as a 
                qualified opportunity zone before the end of 
                the consideration period.
            ``(2) Extension of periods.--A chief executive 
        officer of a State may request that the Secretary 
        extend either the determination or consideration 
        period, or both (determined without regard to this 
        subparagraph), for an additional 30 days.
    ``(c) Other Definitions.--For purposes of this subsection--
            ``(1) Low-income communities.--The term `low-income 
        community' has the same meaning as when used in section 
        45D(e).
            ``(2) Definition of periods.--
                    ``(A) Consideration period.--The term 
                `consideration period' means the 30-day period 
                beginning on the date on which the Secretary 
                receives notice under subsection (b)(1)(A)(ii), 
                as extended under subsection (b)(2).
                    ``(B) Determination period.--The term 
                `determination period' means the 90-day period 
                beginning on the date of the enactment of the 
                Tax Cuts and Jobs Act, as extended under 
                subsection (b)(2).
            ``(3) State.--For purposes of this section, the 
        term `State' includes any possession of the United 
        States.
    ``(d) Number of Designations.--
            ``(1) In general.--Except as provided by paragraph 
        (2), the number of population census tracts in a State 
        that may be designated as qualified opportunity zones 
        under this section may not exceed 25 percent of the 
        number of low-income communities in the State.
            ``(2) Exception.--If the number of low-income 
        communities in a State is less than 100, then a total 
        of 25 of such tracts may be designated as qualified 
        opportunity zones.
    ``(e) Designation of Tracts Contiguous With Low-income 
Communities.--
            ``(1) In general.--A population census tract that 
        is not a low-income community may be designated as a 
        qualified opportunity zone under this section if--
                    ``(A) the tract is contiguous with the low-
                income community that is designated as a 
                qualified opportunity zone, and
                    ``(B) the median family income of the tract 
                does not exceed 125 percent of the median 
                family income of the low-income community with 
                which the tract is contiguous.
            ``(2) Limitation.--Not more than 5 percent of the 
        population census tracts designated in a State as a 
        qualified opportunity zone may be designated under 
        paragraph (1).
    ``(f) Period for Which Designation Is in Effect.--A 
designation as a qualified opportunity zone shall remain in 
effect for the period beginning on the date of the designation 
and ending at the close of the 10th calendar year beginning on 
or after such date of designation.

``SEC. 1400Z-2. SPECIAL RULES FOR CAPITAL GAINS INVESTED IN OPPORTUNITY 
                    ZONES.

    ``(a) In General.--
            ``(1) Treatment of gains.--In the case of gain from 
        the sale to, or exchange with, an unrelated person of 
        any property held by the taxpayer, at the election of 
        the taxpayer--
                    ``(A) gross income for the taxable year 
                shall not include so much of such gain as does 
                not exceed the aggregate amount invested by the 
                taxpayer in a qualified opportunity fund during 
                the 180-day period beginning on the date of 
                such sale or exchange,
                    ``(B) the amount of gain excluded by 
                subparagraph (A) shall be included in gross 
                income as provided by subsection (b), and
                    ``(C) subsection (c) shall apply.
            ``(2) Election.--No election may be made under 
        paragraph (1)--
                    ``(A) with respect to a sale or exchange if 
                an election previously made with respect to 
                such sale or exchange is in effect, or
                    ``(B) with respect to any sale or exchange 
                after December 31, 2026.
    ``(b) Deferral of Gain Invested in Opportunity Zone 
Property.--
            ``(1) Year of inclusion.--Gain to which subsection 
        (a)(1)(B) applies shall be included in income in the 
        taxable year which includes the earlier of--
                    ``(A) the date on which such investment is 
                sold or exchanged, or
                    ``(B) December 31, 2026.
            ``(2) Amount includible.--
                    ``(A) In general.--The amount of gain 
                included in gross income under subsection 
                (a)(1)(A) shall be the excess of--
                            ``(i) the lesser of the amount of 
                        gain excluded under paragraph (1) or 
                        the fair market value of the investment 
                        as determined as of the date described 
                        in paragraph (1), over
                            ``(ii) the taxpayer's basis in the 
                        investment.
                    ``(B) Determination of basis.--
                            ``(i) In general.--Except as 
                        otherwise provided in this clause or 
                        subsection (c), the taxpayer's basis in 
                        the investment shall be zero.
                            ``(ii) Increase for gain recognized 
                        under subsection (a)(1)(B).--The basis 
                        in the investment shall be increased by 
                        the amount of gain recognized by reason 
                        of subsection (a)(1)(B) with respect to 
                        such property.
                            ``(iii) Investments held for 5 
                        years.--In the case of any investment 
                        held for at least 5 years, the basis of 
                        such investment shall be increased by 
                        an amount equal to 10 percent of the 
                        amount of gain deferred by reason of 
                        subsection (a)(1)(A).
                            ``(iv) Investments held for 7 
                        years.--In the case of any investment 
                        held by the taxpayer for at least 7 
                        years, in addition to any adjustment 
                        made under clause (iii), the basis of 
                        such property shall be increased by an 
                        amount equal to 5 percent of the amount 
                        of gain deferred by reason of 
                        subsection (a)(1)(A).
    ``(c) Special Rule for Investments Held for at Least 10 
Years.--In the case of any investment held by the taxpayer for 
at least 10 years and with respect to which the taxpayer makes 
an election under this clause, the basis of such property shall 
be equal to the fair market value of such investment on the 
date that the investment is sold or exchanged.
    ``(d) Qualified Opportunity Fund.--For purposes of this 
section--
            ``(1) In general.--The term `qualified opportunity 
        fund' means any investment vehicle which is organized 
        as a corporation or a partnership for the purpose of 
        investing in qualified opportunity zone property (other 
        than another qualified opportunity fund) that holds at 
        least 90 percent of its assets in qualified opportunity 
        zone property, determined by the average of the 
        percentage of qualified opportunity zone property held 
        in the fund as measured--
                    ``(A) on the last day of the first 6-month 
                period of the taxable year of the fund, and
                    ``(B) on the last day of the taxable year 
                of the fund.
            ``(2) Qualified opportunity zone property.--
                    ``(A) In general.--The term `qualified 
                opportunity zone property' means property which 
                is--
                            ``(i) qualified opportunity zone 
                        stock,
                            ``(ii) qualified opportunity zone 
                        partnership interest, or
                            ``(iii) qualified opportunity zone 
                        business property.
                    ``(B) Qualified opportunity zone stock.--
                            ``(i) In general.--Except as 
                        provided in clause (ii), the term 
                        `qualified opportunity zone stock' 
                        means any stock in a domestic 
                        corporation if--
                                    ``(I) such stock is 
                                acquired by the qualified 
                                opportunity fund after December 
                                31, 2017, at its original issue 
                                (directly or through an 
                                underwriter) from the 
                                corporation solely in exchange 
                                for cash,
                                    ``(II) as of the time such 
                                stock was issued, such 
                                corporation was a qualified 
                                opportunity zone business (or, 
                                in the case of a new 
                                corporation, such corporation 
                                was being organized for 
                                purposes of being a qualified 
                                opportunity zone business), and
                                    ``(III) during 
                                substantially all of the 
                                qualified opportunity fund's 
                                holding period for such stock, 
                                such corporation qualified as a 
                                qualified opportunity zone 
                                business.
                            ``(ii) Redemptions.--A rule similar 
                        to the rule of section 1202(c)(3) shall 
                        apply for purposes of this paragraph.
                    ``(C) Qualified opportunity zone 
                partnership interest.--The term `qualified 
                opportunity zone partnership interest' means 
                any capital or profits interest in a domestic 
                partnership if--
                            ``(i) such interest is acquired by 
                        the qualified opportunity fund after 
                        December 31, 2017, from the partnership 
                        solely in exchange for cash,
                            ``(ii) as of the time such interest 
                        was acquired, such partnership was a 
                        qualified opportunity zone business 
                        (or, in the case of a new partnership, 
                        such partnership was being organized 
                        for purposes of being a qualified 
                        opportunity zone business), and
                            ``(iii) during substantially all of 
                        the qualified opportunity fund's 
                        holding period for such interest, such 
                        partnership qualified as a qualified 
                        opportunity zone business.
                    ``(D) Qualified opportunity zone business 
                property.--
                            ``(i) In general.--The term 
                        `qualified opportunity zone business 
                        property' means tangible property used 
                        in a trade or business of the qualified 
                        opportunity fund if--
                                    ``(I) such property was 
                                acquired by the qualified 
                                opportunity fund by purchase 
                                (as defined in section 
                                179(d)(2)) after December 31, 
                                2017,
                                    ``(II) the original use of 
                                such property in the qualified 
                                opportunity zone commences with 
                                the qualified opportunity fund 
                                or the qualified opportunity 
                                fund substantially improves the 
                                property, and
                                    ``(III) during 
                                substantially all of the 
                                qualified opportunity fund's 
                                holding period for such 
                                property, substantially all of 
                                the use of such property was in 
                                a qualified opportunity zone.
                            ``(ii) Substantial improvement.--
                        For purposes of subparagraph (A)(ii), 
                        property shall be treated as 
                        substantially improved by the qualified 
                        opportunity fund only if, during any 
                        30-month period beginning after the 
                        date of acquisition of such property, 
                        additions to basis with respect to such 
                        property in the hands of the qualified 
                        opportunity fund exceed an amount equal 
                        to the adjusted basis of such property 
                        at the beginning of such 30-month 
                        period in the hands of the qualified 
                        opportunity fund.
                            ``(iii) Related party.--For 
                        purposes of subparagraph (A)(i), the 
                        related person rule of section 
                        179(d)(2) shall be applied pursuant to 
                        paragraph (8) of this subsection in 
                        lieu of the application of such rule in 
                        section 179(d)(2)(A).
            ``(3) Qualified opportunity zone business.--
                    ``(A) In general.--The term `qualified 
                opportunity zone business' means a trade or 
                business--
                            ``(i) in which substantially all of 
                        the tangible property owned or leased 
                        by the taxpayer is qualified 
                        opportunity zone business property 
                        (determined by substituting `qualified 
                        opportunity zone business' for 
                        `qualified opportunity fund' each place 
                        it appears in paragraph (2)(D)),
                            ``(ii) which satisfies the 
                        requirements of paragraphs (2), (4), 
                        and (8) of section 1397C(b), and
                            ``(iii) which is not described in 
                        section 144(c)(6)(B).
                    ``(B) Special rule.--For purposes of 
                subparagraph (A), tangible property that ceases 
                to be a qualified opportunity zone business 
                property shall continue to be treated as a 
                qualified opportunity zone business property 
                for the lesser of--
                            ``(i) 5 years after the date on 
                        which such tangible property ceases to 
                        be so qualified, or
                            ``(ii) the date on which such 
                        tangible property is no longer held by 
                        the qualified opportunity zone 
                        business.
    ``(e) Applicable Rules.--
            ``(1) Treatment of investments with mixed funds.--
        In the case of any investment in a qualified 
        opportunity fund only a portion of which consists of 
        investments of gain to which an election under 
        subsection (a) is in effect--
                    ``(A) such investment shall be treated as 2 
                separate investments, consisting of--
                            ``(i) one investment that only 
                        includes amounts to which the election 
                        under subsection (a) applies, and
                            ``(ii) a separate investment 
                        consisting of other amounts, and
                    ``(B) subsections (a), (b), and (c) shall 
                only apply to the investment described in 
                subparagraph (A)(i).
            ``(2) Related persons.--For purposes of this 
        section, persons are related to each other if such 
        persons are described in section 267(b) or 707(b)(1), 
        determined by substituting `20 percent' for `50 
        percent' each place it occurs in such sections.
            ``(3) Decedents.--In the case of a decedent, 
        amounts recognized under this section shall, if not 
        properly includible in the gross income of the 
        decedent, be includible in gross income as provided by 
        section 691.
            ``(4) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary or appropriate to 
        carry out the purposes of this section, including--
                    ``(A) rules for the certification of 
                qualified opportunity funds for the purposes of 
                this section,
                    ``(B) rules to ensure a qualified 
                opportunity fund has a reasonable period of 
                time to reinvest the return of capital from 
                investments in qualified opportunity zone stock 
                and qualified opportunity zone partnership 
                interests, and to reinvest proceeds received 
                from the sale or disposition of qualified 
                opportunity zone property, and
                    ``(C) rules to prevent abuse.
    ``(f) Failure of Qualified Opportunity Fund to Maintain 
Investment Standard.--
            ``(1) In general.--If a qualified opportunity fund 
        fails to meet the 90-percent requirement of subsection 
        (c)(1), the qualified opportunity fund shall pay a 
        penalty for each month it fails to meet the requirement 
        in an amount equal to the product of--
                    ``(A) the excess of--
                            ``(i) the amount equal to 90 
                        percent of its aggregate assets, over
                            ``(ii) the aggregate amount of 
                        qualified opportunity zone property 
                        held by the fund, multiplied by
                    ``(B) the underpayment rate established 
                under section 6621(a)(2) for such month.
            ``(2) Special rule for partnerships.--In the case 
        that the qualified opportunity fund is a partnership, 
        the penalty imposed by paragraph (1) shall be taken 
        into account proportionately as part of the 
        distributive share of each partner of the partnership.
            ``(3) Reasonable cause exception.--No penalty shall 
        be imposed under this subsection with respect to any 
        failure if it is shown that such failure is due to 
        reasonable cause.''.
    (b) Basis Adjustments.--Section 1016(a) is amended by 
striking ``and'' at the end of paragraph (36), by striking the 
period at the end of paragraph (37) and inserting ``, and'', 
and by inserting after paragraph (37) the following:
            ``(38) to the extent provided in subsections (b)(2) 
        and (c) of section 1400Z-2.''.
    (c) Clerical Amendment.--The table of subchapters for 
chapter 1 is amended by adding at the end the following new 
item:

                  ``subchapter z. opportunity zones''.

    (d) Effective Date.--The amendments made by this section 
shall take effect on the date of the enactment of this Act.

                Subtitle D--International Tax Provisions

                     PART I--OUTBOUND TRANSACTIONS

Subpart A--Establishment of Participation Exemption System for Taxation 
                           of Foreign Income

SEC. 14101. DEDUCTION FOR FOREIGN-SOURCE PORTION OF DIVIDENDS RECEIVED 
                    BY DOMESTIC CORPORATIONS FROM SPECIFIED 10-PERCENT 
                    OWNED FOREIGN CORPORATIONS.

    (a) In General.--Part VIII of subchapter B of chapter 1 is 
amended by inserting after section 245 the following new 
section:

``SEC. 245A. DEDUCTION FOR FOREIGN SOURCE-PORTION OF DIVIDENDS RECEIVED 
                    BY DOMESTIC CORPORATIONS FROM SPECIFIED 10-PERCENT 
                    OWNED FOREIGN CORPORATIONS.

    ``(a) In General.--In the case of any dividend received 
from a specified 10-percent owned foreign corporation by a 
domestic corporation which is a United States shareholder with 
respect to such foreign corporation, there shall be allowed as 
a deduction an amount equal to the foreign-source portion of 
such dividend.
    ``(b) Specified 10-percent Owned Foreign Corporation.--For 
purposes of this section--
            ``(1) In general.--The term `specified 10-percent 
        owned foreign corporation' means any foreign 
        corporation with respect to which any domestic 
        corporation is a United States shareholder with respect 
        to such corporation.
            ``(2) Exclusion of passive foreign investment 
        companies.--Such term shall not include any corporation 
        which is a passive foreign investment company (as 
        defined in section 1297) with respect to the 
        shareholder and which is not a controlled foreign 
        corporation.
    ``(c) Foreign-source Portion.--For purposes of this 
section--
            ``(1) In general.--The foreign-source portion of 
        any dividend from a specified 10-percent owned foreign 
        corporation is an amount which bears the same ratio to 
        such dividend as--
                    ``(A) the undistributed foreign earnings of 
                the specified 10-percent owned foreign 
                corporation, bears to
                    ``(B) the total undistributed earnings of 
                such foreign corporation.
            ``(2) Undistributed earnings.--The term 
        `undistributed earnings' means the amount of the 
        earnings and profits of the specified 10-percent owned 
        foreign corporation (computed in accordance with 
        sections 964(a) and 986)--
                    ``(A) as of the close of the taxable year 
                of the specified 10-percent owned foreign 
                corporation in which the dividend is 
                distributed, and
                    ``(B) without diminution by reason of 
                dividends distributed during such taxable year.
            ``(3) Undistributed foreign earnings.--The term 
        `undistributed foreign earnings' means the portion of 
        the undistributed earnings which is attributable to 
        neither--
                    ``(A) income described in subparagraph (A) 
                of section 245(a)(5), nor
                    ``(B) dividends described in subparagraph 
                (B) of such section (determined without regard 
                to section 245(a)(12)).
    ``(d) Disallowance of Foreign Tax Credit, etc.--
            ``(1) In general.--No credit shall be allowed under 
        section 901 for any taxes paid or accrued (or treated 
        as paid or accrued) with respect to any dividend for 
        which a deduction is allowed under this section.
            ``(2) Denial of deduction.--No deduction shall be 
        allowed under this chapter for any tax for which credit 
        is not allowable under section 901 by reason of 
        paragraph (1) (determined by treating the taxpayer as 
        having elected the benefits of subpart A of part III of 
        subchapter N).
    ``(e) Special Rules for Hybrid Dividends.--
            ``(1) In general.--Subsection (a) shall not apply 
        to any dividend received by a United States shareholder 
        from a controlled foreign corporation if the dividend 
        is a hybrid dividend.
            ``(2) Hybrid dividends of tiered corporations.--If 
        a controlled foreign corporation with respect to which 
        a domestic corporation is a United States shareholder 
        receives a hybrid dividend from any other controlled 
        foreign corporation with respect to which such domestic 
        corporation is also a United States shareholder, then, 
        notwithstanding any other provision of this title--
                    ``(A) the hybrid dividend shall be treated 
                for purposes of section 951(a)(1)(A) as subpart 
                F income of the receiving controlled foreign 
                corporation for the taxable year of the 
                controlled foreign corporation in which the 
                dividend was received, and
                    ``(B) the United States shareholder shall 
                include in gross income an amount equal to the 
                shareholder's pro rata share (determined in the 
                same manner as under section 951(a)(2)) of the 
                subpart F income described in subparagraph (A).
            ``(3) Denial of foreign tax credit, etc.--The rules 
        of subsection (d) shall apply to any hybrid dividend 
        received by, or any amount included under paragraph (2) 
        in the gross income of, a United States shareholder.
            ``(4) Hybrid dividend.--The term `hybrid dividend' 
        means an amount received from a controlled foreign 
        corporation--
                    ``(A) for which a deduction would be 
                allowed under subsection (a) but for this 
                subsection, and
                    ``(B) for which the controlled foreign 
                corporation received a deduction (or other tax 
                benefit) with respect to any income, war 
                profits, or excess profits taxes imposed by any 
                foreign country or possession of the United 
                States.
    ``(f) Special Rule for Purging Distributions of Passive 
Foreign Investment Companies.--Any amount which is treated as a 
dividend under section 1291(d)(2)(B) shall not be treated as a 
dividend for purposes of this section.
    ``(g) Regulations.--The Secretary shall prescribe such 
regulations or other guidance as may be necessary or 
appropriate to carry out the provisions of this section, 
including regulations for the treatment of United States 
shareholders owning stock of a specified 10 percent owned 
foreign corporation through a partnership.''.
    (b) Application of Holding Period Requirement.--Subsection 
(c) of section 246 is amended--
            (1) by striking ``or 245'' in paragraph (1) and 
        inserting ``245, or 245A'', and
            (2) by adding at the end the following new 
        paragraph:
            ``(5) Special rules for foreign source portion of 
        dividends received from specified 10-percent owned 
        foreign corporations.--
                    ``(A) 1-year holding period requirement.--
                For purposes of section 245A--
                            ``(i) paragraph (1)(A) shall be 
                        applied--
                                    ``(I) by substituting `365 
                                days' for `45 days' each place 
                                it appears, and
                                    ``(II) by substituting 
                                `731-day period' for `91-day 
                                period', and
                            ``(ii) paragraph (2) shall not 
                        apply.
                    ``(B) Status must be maintained during 
                holding period.--For purposes of applying 
                paragraph (1) with respect to section 245A, the 
                taxpayer shall be treated as holding the stock 
                referred to in paragraph (1) for any period 
                only if--
                            ``(i) the specified 10-percent 
                        owned foreign corporation referred to 
                        in section 245A(a) is a specified 10-
                        percent owned foreign corporation at 
                        all times during such period, and
                            ``(ii) the taxpayer is a United 
                        States shareholder with respect to such 
                        specified 10-percent owned foreign 
                        corporation at all times during such 
                        period.''.
    (c) Application of Rules Generally Applicable to Deductions 
for Dividends Received.--
            (1) Treatment of dividends from certain 
        corporations.--Paragraph (1) of section 246(a) is 
        amended by striking ``and 245'' and inserting ``245, 
        and 245A''.
            (2) Coordination with section 1059.--Subparagraph 
        (B) of section 1059(b)(2) is amended by striking ``or 
        245'' and inserting ``245, or 245A''.
    (d) Coordination With Foreign Tax Credit Limitation.--
Subsection (b) of section 904 is amended by adding at the end 
the following new paragraph:
            ``(5) Treatment of dividends for which deduction is 
        allowed under section 245a.--For purposes of subsection 
        (a), in the case of a domestic corporation which is a 
        United States shareholder with respect to a specified 
        10-percent owned foreign corporation, such 
        shareholder's taxable income from sources without the 
        United States (and entire taxable income) shall be 
        determined without regard to--
                    ``(A) the foreign-source portion of any 
                dividend received from such foreign 
                corporation, and
                    ``(B) any deductions properly allocable or 
                apportioned to--
                            ``(i) income (other than amounts 
                        includible under section 951(a)(1) or 
                        951A(a)) with respect to stock of such 
                        specified 10-percent owned foreign 
                        corporation, or
                            ``(ii) such stock to the extent 
                        income with respect to such stock is 
                        other than amounts includible under 
                        section 951(a)(1) or 951A(a).
        Any term which is used in section 245A and in this 
        paragraph shall have the same meaning for purposes of 
        this paragraph as when used in such section.''.
    (e) Conforming Amendments.--
            (1) Subsection (b) of section 951 is amended by 
        striking ``subpart'' and inserting ``title''.
            (2) Subsection (a) of section 957 is amended by 
        striking ``subpart'' in the matter preceding paragraph 
        (1) and inserting ``title''.
            (3) The table of sections for part VIII of 
        subchapter B of chapter 1 is amended by inserting after 
        the item relating to section 245 the following new 
        item:

``Sec. 245A. Deduction for foreign source-portion of dividends received 
          by domestic corporations from certain 10-percent owned foreign 
          corporations.''.

    (f) Effective Date.--The amendments made by this section 
shall apply to distributions made after (and, in the case of 
the amendments made by subsection (d), deductions with respect 
to taxable years ending after) December 31, 2017.

SEC. 14102. SPECIAL RULES RELATING TO SALES OR TRANSFERS INVOLVING 
                    SPECIFIED 10-PERCENT OWNED FOREIGN CORPORATIONS.

    (a) Sales by United States Persons of Stock.--
            (1) In general.--Section 1248 is amended by 
        redesignating subsection (j) as subsection (k) and by 
        inserting after subsection (i) the following new 
        subsection:
    ``(j) Coordination With Dividends Received Deduction.--In 
the case of the sale or exchange by a domestic corporation of 
stock in a foreign corporation held for 1 year or more, any 
amount received by the domestic corporation which is treated as 
a dividend by reason of this section shall be treated as a 
dividend for purposes of applying section 245A.''.
            (2) Effective date.--The amendments made by this 
        subsection shall apply to sales or exchanges after 
        December 31, 2017.
    (b) Basis in Specified 10-percent Owned Foreign Corporation 
Reduced by Nontaxed Portion of Dividend for Purposes of 
Determining Loss.--
            (1) In general.--Section 961 is amended by adding 
        at the end the following new subsection:
    ``(d) Basis in Specified 10-percent Owned Foreign 
Corporation Reduced by Nontaxed Portion of Dividend for 
Purposes of Determining Loss.--If a domestic corporation 
received a dividend from a specified 10-percent owned foreign 
corporation (as defined in section 245A) in any taxable year, 
solely for purposes of determining loss on any disposition of 
stock of such foreign corporation in such taxable year or any 
subsequent taxable year, the basis of such domestic corporation 
in such stock shall be reduced (but not below zero) by the 
amount of any deduction allowable to such domestic corporation 
under section 245A with respect to such stock except to the 
extent such basis was reduced under section 1059 by reason of a 
dividend for which such a deduction was allowable.''.
            (2) Effective date.--The amendments made by this 
        subsection shall apply to distributions made after 
        December 31, 2017.
    (c) Sale by a CFC of a Lower Tier CFC.--
            (1) In general.--Section 964(e) is amended by 
        adding at the end the following new paragraph:
            ``(4) Coordination with dividends received 
        deduction.--
                    ``(A) In general.--If, for any taxable year 
                of a controlled foreign corporation beginning 
                after December 31, 2017, any amount is treated 
                as a dividend under paragraph (1) by reason of 
                a sale or exchange by the controlled foreign 
                corporation of stock in another foreign 
                corporation held for 1 year or more, then, 
                notwithstanding any other provision of this 
                title--
                            ``(i) the foreign-source portion of 
                        such dividend shall be treated for 
                        purposes of section 951(a)(1)(A) as 
                        subpart F income of the selling 
                        controlled foreign corporation for such 
                        taxable year,
                            ``(ii) a United States shareholder 
                        with respect to the selling controlled 
                        foreign corporation shall include in 
                        gross income for the taxable year of 
                        the shareholder with or within which 
                        such taxable year of the controlled 
                        foreign corporation ends an amount 
                        equal to the shareholder's pro rata 
                        share (determined in the same manner as 
                        under section 951(a)(2)) of the amount 
                        treated as subpart F income under 
                        clause (i), and
                            ``(iii) the deduction under section 
                        245A(a) shall be allowable to the 
                        United States shareholder with respect 
                        to the subpart F income included in 
                        gross income under clause (ii) in the 
                        same manner as if such subpart F income 
                        were a dividend received by the 
                        shareholder from the selling controlled 
                        foreign corporation.
                    ``(B) Application of basis or similar 
                adjustment.--For purposes of this title, in the 
                case of a sale or exchange by a controlled 
                foreign corporation of stock in another foreign 
                corporation in a taxable year of the selling 
                controlled foreign corporation beginning after 
                December 31, 2017, rules similar to the rules 
                of section 961(d) shall apply.
                    ``(C) Foreign-source portion.--For purposes 
                of this paragraph, the foreign-source portion 
                of any amount treated as a dividend under 
                paragraph (1) shall be determined in the same 
                manner as under section 245A(c).''.
            (2) Effective date.--The amendments made by this 
        subsection shall apply to sales or exchanges after 
        December 31, 2017.
    (d) Treatment of Foreign Branch Losses Transferred to 
Specified 10-percent Owned Foreign Corporations.--
            (1) In general.--Part II of subchapter B of chapter 
        1 is amended by adding at the end the following new 
        section:

``SEC. 91. CERTAIN FOREIGN BRANCH LOSSES TRANSFERRED TO SPECIFIED 10-
                    PERCENT OWNED FOREIGN CORPORATIONS.

    ``(a) In General.--If a domestic corporation transfers 
substantially all of the assets of a foreign branch (within the 
meaning of section 367(a)(3)(C), as in effect before the date 
of the enactment of the Tax Cuts and Jobs Act) to a specified 
10-percent owned foreign corporation (as defined in section 
245A) with respect to which it is a United States shareholder 
after such transfer, such domestic corporation shall include in 
gross income for the taxable year which includes such transfer 
an amount equal to the transferred loss amount with respect to 
such transfer.
    ``(b) Transferred Loss Amount.--For purposes of this 
section, the term `transferred loss amount' means, with respect 
to any transfer of substantially all of the assets of a foreign 
branch, the excess (if any) of--
            ``(1) the sum of losses--
                    ``(A) which were incurred by the foreign 
                branch after December 31, 2017, and before the 
                transfer, and
                    ``(B) with respect to which a deduction was 
                allowed to the taxpayer, over
            ``(2) the sum of--
                    ``(A) any taxable income of such branch for 
                a taxable year after the taxable year in which 
                the loss was incurred and through the close of 
                the taxable year of the transfer, and
                    ``(B) any amount which is recognized under 
                section 904(f)(3) on account of the transfer.
    ``(c) Reduction for Recognized Gains.--The transferred loss 
amount shall be reduced (but not below zero) by the amount of 
gain recognized by the taxpayer on account of the transfer 
(other than amounts taken into account under subsection 
(b)(2)(B)).
    ``(d) Source of Income.--Amounts included in gross income 
under this section shall be treated as derived from sources 
within the United States.
    ``(e) Basis Adjustments.--Consistent with such regulations 
or other guidance as the Secretary shall prescribe, proper 
adjustments shall be made in the adjusted basis of the 
taxpayer's stock in the specified 10-percent owned foreign 
corporation to which the transfer is made, and in the 
transferee's adjusted basis in the property transferred, to 
reflect amounts included in gross income under this section.''.
            (2) Clerical amendment.--The table of sections for 
        part II of subchapter B of chapter 1 is amended by 
        adding at the end the following new item:

``Sec. 91. Certain foreign branch losses transferred to specified 10-
          percent owned foreign corporations.''.

            (3) Effective date.--The amendments made by this 
        subsection shall apply to transfers after December 31, 
        2017.
            (4) Transition rule.--The amount of gain taken into 
        account under section 91(c) of the Internal Revenue 
        Code of 1986, as added by this subsection, shall be 
        reduced by the amount of gain which would be recognized 
        under section 367(a)(3)(C) (determined without regard 
        to the amendments made by subsection (e)) with respect 
        to losses incurred before January 1, 2018.
    (e) Repeal of Active Trade or Business Exception Under 
Section 367.--
            (1) In general.--Section 367(a) is amended by 
        striking paragraph (3) and redesignating paragraphs 
        (4), (5), and (6) as paragraphs (3), (4), and (5), 
        respectively.
            (2) Conforming amendments.--Section 367(a)(4), as 
        redesignated by paragraph (1), is amended--
                    (A) by striking ``Paragraphs (2) and (3)'' 
                and inserting ``Paragraph (2)'', and
                    (B) by striking ``Paragraphs (2) and (3)'' 
                in the heading and inserting ``Paragraph (2)''.
            (3) Effective date.--The amendments made by this 
        subsection shall apply to transfers after December 31, 
        2017.

SEC. 14103. TREATMENT OF DEFERRED FOREIGN INCOME UPON TRANSITION TO 
                    PARTICIPATION EXEMPTION SYSTEM OF TAXATION.

    (a) In General.--Section 965 is amended to read as follows:

``SEC. 965. TREATMENT OF DEFERRED FOREIGN INCOME UPON TRANSITION TO 
                    PARTICIPATION EXEMPTION SYSTEM OF TAXATION.

    ``(a) Treatment of Deferred Foreign Income as Subpart F 
Income.--In the case of the last taxable year of a deferred 
foreign income corporation which begins before January 1, 2018, 
the subpart F income of such foreign corporation (as otherwise 
determined for such taxable year under section 952) shall be 
increased by the greater of--
            ``(1) the accumulated post-1986 deferred foreign 
        income of such corporation determined as of November 2, 
        2017, or
            ``(2) the accumulated post-1986 deferred foreign 
        income of such corporation determined as of December 
        31, 2017.
    ``(b) Reduction in Amounts Included in Gross Income of 
United States Shareholders of Specified Foreign Corporations 
With Deficits in Earnings and Profits.--
            ``(1) In general.--In the case of a taxpayer which 
        is a United States shareholder with respect to at least 
        one deferred foreign income corporation and at least 
        one E&P deficit foreign corporation, the amount which 
        would (but for this subsection) be taken into account 
        under section 951(a)(1) by reason of subsection (a) as 
        such United States shareholder's pro rata share of the 
        subpart F income of each deferred foreign income 
        corporation shall be reduced by the amount of such 
        United States shareholder's aggregate foreign E&P 
        deficit which is allocated under paragraph (2) to such 
        deferred foreign income corporation.
            ``(2) Allocation of aggregate foreign e&p 
        deficit.--The aggregate foreign E&P deficit of any 
        United States shareholder shall be allocated among the 
        deferred foreign income corporations of such United 
        States shareholder in an amount which bears the same 
        proportion to such aggregate as--
                    ``(A) such United States shareholder's pro 
                rata share of the accumulated post-1986 
                deferred foreign income of each such deferred 
                foreign income corporation, bears to
                    ``(B) the aggregate of such United States 
                shareholder's pro rata share of the accumulated 
                post-1986 deferred foreign income of all 
                deferred foreign income corporations of such 
                United States shareholder.
            ``(3) Definitions related to e&p deficits.--For 
        purposes of this subsection--
                    ``(A) Aggregate foreign e&p deficit.--
                            ``(i) In general.--The term 
                        `aggregate foreign E&P deficit' means, 
                        with respect to any United States 
                        shareholder, the lesser of--
                                    ``(I) the aggregate of such 
                                shareholder's pro rata shares 
                                of the specified E&P deficits 
                                of the E&P deficit foreign 
                                corporations of such 
                                shareholder, or
                                    ``(II) the amount 
                                determined under paragraph 
                                (2)(B).
                            ``(ii) Allocation of deficit.--If 
                        the amount described in clause (i)(II) 
                        is less than the amount described in 
                        clause (i)(I), then the shareholder 
                        shall designate, in such form and 
                        manner as the Secretary determines--
                                    ``(I) the amount of the 
                                specified E&P deficit which is 
                                to be taken into account for 
                                each E&P deficit corporation 
                                with respect to the taxpayer, 
                                and
                                    ``(II) in the case of an 
                                E&P deficit corporation which 
                                has a qualified deficit (as 
                                defined in section 952), the 
                                portion (if any) of the deficit 
                                taken into account under 
                                subclause (I) which is 
                                attributable to a qualified 
                                deficit, including the 
                                qualified activities to which 
                                such portion is attributable.
                    ``(B) E&P deficit foreign corporation.--The 
                term `E&P deficit foreign corporation' means, 
                with respect to any taxpayer, any specified 
                foreign corporation with respect to which such 
                taxpayer is a United States shareholder, if, as 
                of November 2, 2017--
                            ``(i) such specified foreign 
                        corporation has a deficit in post-1986 
                        earnings and profits,
                            ``(ii) such corporation was a 
                        specified foreign corporation, and
                            ``(iii) such taxpayer was a United 
                        States shareholder of such corporation.
                    ``(C) Specified e&p deficit.--The term 
                `specified E&P deficit' means, with respect to 
                any E&P deficit foreign corporation, the amount 
                of the deficit referred to in subparagraph (B).
            ``(4) Treatment of earnings and profits in future 
        years.--
                    ``(A) Reduced earnings and profits treated 
                as previously taxed income when distributed.--
                For purposes of applying section 959 in any 
                taxable year beginning with the taxable year 
                described in subsection (a), with respect to 
                any United States shareholder of a deferred 
                foreign income corporation, an amount equal to 
                such shareholder's reduction under paragraph 
                (1) which is allocated to such deferred foreign 
                income corporation under this subsection shall 
                be treated as an amount which was included in 
                the gross income of such United States 
                shareholder under section 951(a).
                    ``(B) E&P deficits.--For purposes of this 
                title, with respect to any taxable year 
                beginning with the taxable year described in 
                subsection (a), a United States shareholder's 
                pro rata share of the earnings and profits of 
                any E&P deficit foreign corporation under this 
                subsection shall be increased by the amount of 
                the specified E&P deficit of such corporation 
                taken into account by such shareholder under 
                paragraph (1), and, for purposes of section 
                952, such increase shall be attributable to the 
                same activity to which the deficit so taken 
                into account was attributable.
            ``(5) Netting among united states shareholders in 
        same affiliated group.--
                    ``(A) In general.--In the case of any 
                affiliated group which includes at least one 
                E&P net surplus shareholder and one E&P net 
                deficit shareholder, the amount which would 
                (but for this paragraph) be taken into account 
                under section 951(a)(1) by reason of subsection 
                (a) by each such E&P net surplus shareholder 
                shall be reduced (but not below zero) by such 
                shareholder's applicable share of the 
                affiliated group's aggregate unused E&P 
                deficit.
                    ``(B) E&P net surplus shareholder.--For 
                purposes of this paragraph, the term `E&P net 
                surplus shareholder' means any United States 
                shareholder which would (determined without 
                regard to this paragraph) take into account an 
                amount greater than zero under section 
                951(a)(1) by reason of subsection (a).
                    ``(C) E&P net deficit shareholder.--For 
                purposes of this paragraph, the term `E&P net 
                deficit shareholder' means any United States 
                shareholder if--
                            ``(i) the aggregate foreign E&P 
                        deficit with respect to such 
                        shareholder (as defined in paragraph 
                        (3)(A) without regard to clause (i)(II) 
                        thereof), exceeds
                            ``(ii) the amount which would (but 
                        for this subsection) be taken into 
                        account by such shareholder under 
                        section 951(a)(1) by reason of 
                        subsection (a).
                    ``(D) Aggregate unused e&p deficit.--For 
                purposes of this paragraph--
                            ``(i) In general.--The term 
                        `aggregate unused E&P deficit' means, 
                        with respect to any affiliated group, 
                        the lesser of--
                                    ``(I) the sum of the 
                                excesses described in 
                                subparagraph (C), determined 
                                with respect to each E&P net 
                                deficit shareholder in such 
                                group, or
                                    ``(II) the amount 
                                determined under subparagraph 
                                (E)(ii).
                            ``(ii) Reduction with respect to 
                        e&p net deficit shareholders which are 
                        not wholly owned by the affiliated 
                        group.--If the group ownership 
                        percentage of any E&P net deficit 
                        shareholder is less than 100 percent, 
                        the amount of the excess described in 
                        subparagraph (C) which is taken into 
                        account under clause (i)(I) with 
                        respect to such E&P net deficit 
                        shareholder shall be such group 
                        ownership percentage of such amount.
                    ``(E) Applicable share.--For purposes of 
                this paragraph, the term `applicable share' 
                means, with respect to any E&P net surplus 
                shareholder in any affiliated group, the amount 
                which bears the same proportion to such group's 
                aggregate unused E&P deficit as--
                            ``(i) the product of--
                                    ``(I) such shareholder's 
                                group ownership percentage, 
                                multiplied by
                                    ``(II) the amount which 
                                would (but for this paragraph) 
                                be taken into account under 
                                section 951(a)(1) by reason of 
                                subsection (a) by such 
                                shareholder, bears to
                            ``(ii) the aggregate amount 
                        determined under clause (i) with 
                        respect to all E&P net surplus 
                        shareholders in such group.
                    ``(F) Group ownership percentage.--For 
                purposes of this paragraph, the term `group 
                ownership percentage' means, with respect to 
                any United States shareholder in any affiliated 
                group, the percentage of the value of the stock 
                of such United States shareholder which is held 
                by other includible corporations in such 
                affiliated group. Notwithstanding the preceding 
                sentence, the group ownership percentage of the 
                common parent of the affiliated group is 100 
                percent. Any term used in this subparagraph 
                which is also used in section 1504 shall have 
                the same meaning as when used in such section.
    ``(c) Application of Participation Exemption to Included 
Income.--
            ``(1) In general.--In the case of a United States 
        shareholder of a deferred foreign income corporation, 
        there shall be allowed as a deduction for the taxable 
        year in which an amount is included in the gross income 
        of such United States shareholder under section 
        951(a)(1) by reason of this section an amount equal to 
        the sum of--
                    ``(A) the United States shareholder's 8 
                percent rate equivalent percentage of the 
                excess (if any) of--
                            ``(i) the amount so included as 
                        gross income, over
                            ``(ii) the amount of such United 
                        States shareholder's aggregate foreign 
                        cash position, plus
                    ``(B) the United States shareholder's 15.5 
                percent rate equivalent percentage of so much 
                of the amount described in subparagraph (A)(ii) 
                as does not exceed the amount described in 
                subparagraph (A)(i).
            ``(2) 8 and 15.5 percent rate equivalent 
        percentages.--For purposes of this subsection--
                    ``(A) 8 percent rate equivalent 
                percentage.--The term `8 percent rate 
                equivalent percentage' means, with respect to 
                any United States shareholder for any taxable 
                year, the percentage which would result in the 
                amount to which such percentage applies being 
                subject to a 8 percent rate of tax determined 
                by only taking into account a deduction equal 
                to such percentage of such amount and the 
                highest rate of tax specified in section 11 for 
                such taxable year. In the case of any taxable 
                year of a United States shareholder to which 
                section 15 applies, the highest rate of tax 
                under section 11 before the effective date of 
                the change in rates and the highest rate of tax 
                under section 11 after the effective date of 
                such change shall each be taken into account 
                under the preceding sentence in the same 
                proportions as the portion of such taxable year 
                which is before and after such effective date, 
                respectively.
                    ``(B) 15.5 percent rate equivalent 
                percentage.--The term `15.5 percent rate 
                equivalent percentage' means, with respect to 
                any United States shareholder for any taxable 
                year, the percentage determined under 
                subparagraph (A) applied by substituting `15.5 
                percent rate of tax' for `8 percent rate of 
                tax'.
            ``(3) Aggregate foreign cash position.--For 
        purposes of this subsection--
                    ``(A) In general.--The term `aggregate 
                foreign cash position' means, with respect to 
                any United States shareholder, the greater of--
                            ``(i) the aggregate of such United 
                        States shareholder's pro rata share of 
                        the cash position of each specified 
                        foreign corporation of such United 
                        States shareholder determined as of the 
                        close of the last taxable year of such 
                        specified foreign corporation which 
                        begins before January 1, 2018, or
                            ``(ii) one half of the sum of--
                                    ``(I) the aggregate 
                                described in clause (i) 
                                determined as of the close of 
                                the last taxable year of each 
                                such specified foreign 
                                corporation which ends before 
                                November 2, 2017, plus
                                    ``(II) the aggregate 
                                described in clause (i) 
                                determined as of the close of 
                                the taxable year of each such 
                                specified foreign corporation 
                                which precedes the taxable year 
                                referred to in subclause (I).
                    ``(B) Cash position.--For purposes of this 
                paragraph, the cash position of any specified 
                foreign corporation is the sum of--
                            ``(i) cash held by such foreign 
                        corporation,
                            ``(ii) the net accounts receivable 
                        of such foreign corporation, plus
                            ``(iii) the fair market value of 
                        the following assets held by such 
                        corporation:
                                    ``(I) Personal property 
                                which is of a type that is 
                                actively traded and for which 
                                there is an established 
                                financial market.
                                    ``(II) Commercial paper, 
                                certificates of deposit, the 
                                securities of the Federal 
                                government and of any State or 
                                foreign government.
                                    ``(III) Any foreign 
                                currency.
                                    ``(IV) Any obligation with 
                                a term of less than one year.
                                    ``(V) Any asset which the 
                                Secretary identifies as being 
                                economically equivalent to any 
                                asset described in this 
                                subparagraph.
                    ``(C) Net accounts receivable.--For 
                purposes of this paragraph, the term `net 
                accounts receivable' means, with respect to any 
                specified foreign corporation, the excess (if 
                any) of--
                            ``(i) such corporation's accounts 
                        receivable, over
                            ``(ii) such corporation's accounts 
                        payable (determined consistent with the 
                        rules of section 461).
                    ``(D) Prevention of double counting.--Cash 
                positions of a specified foreign corporation 
                described in clause (ii), (iii)(I), or 
                (iii)(IV) of subparagraph (B) shall not be 
                taken into account by a United States 
                shareholder under subparagraph (A) to the 
                extent that such United States shareholder 
                demonstrates to the satisfaction of the 
                Secretary that such amount is so taken into 
                account by such United States shareholder with 
                respect to another specified foreign 
                corporation.
                    ``(E) Cash positions of certain non-
                corporate entities taken into account.--An 
                entity (other than a corporation) shall be 
                treated as a specified foreign corporation of a 
                United States shareholder for purposes of 
                determining such United States shareholder's 
                aggregate foreign cash position if any interest 
                in such entity is held by a specified foreign 
                corporation of such United States shareholder 
                (determined after application of this 
                subparagraph) and such entity would be a 
                specified foreign corporation of such United 
                States shareholder if such entity were a 
                foreign corporation.
                    ``(F) Anti-abuse.--If the Secretary 
                determines that a principal purpose of any 
                transaction was to reduce the aggregate foreign 
                cash position taken into account under this 
                subsection, such transaction shall be 
                disregarded for purposes of this subsection.
    ``(d) Deferred Foreign Income Corporation; Accumulated 
Post-1986 Deferred Foreign Income.--For purposes of this 
section--
            ``(1) Deferred foreign income corporation.--The 
        term `deferred foreign income corporation' means, with 
        respect to any United States shareholder, any specified 
        foreign corporation of such United States shareholder 
        which has accumulated post-1986 deferred foreign income 
        (as of the date referred to in paragraph (1) or (2) of 
        subsection (a)) greater than zero.
            ``(2) Accumulated post-1986 deferred foreign 
        income.--The term `accumulated post-1986 deferred 
        foreign income' means the post-1986 earnings and 
        profits except to the extent such earnings--
                    ``(A) are attributable to income of the 
                specified foreign corporation which is 
                effectively connected with the conduct of a 
                trade or business within the United States and 
                subject to tax under this chapter, or
                    ``(B) in the case of a controlled foreign 
                corporation, if distributed, would be excluded 
                from the gross income of a United States 
                shareholder under section 959.
        To the extent provided in regulations or other guidance 
        prescribed by the Secretary, in the case of any 
        controlled foreign corporation which has shareholders 
        which are not United States shareholders, accumulated 
        post-1986 deferred foreign income shall be 
        appropriately reduced by amounts which would be 
        described in subparagraph (B) if such shareholders were 
        United States shareholders.
            ``(3) Post-1986 earnings and profits.--The term 
        `post-1986 earnings and profits' means the earnings and 
        profits of the foreign corporation (computed in 
        accordance with sections 964(a) and 986, and by only 
        taking into account periods when the foreign 
        corporation was a specified foreign corporation) 
        accumulated in taxable years beginning after December 
        31, 1986, and determined--
                    ``(A) as of the date referred to in 
                paragraph (1) or (2) of subsection (a), 
                whichever is applicable with respect to such 
                foreign corporation, and
                    ``(B) without diminution by reason of 
                dividends distributed during the taxable year 
                described in subsection (a) other than 
                dividends distributed to another specified 
                foreign corporation.
    ``(e) Specified Foreign Corporation.--
            ``(1) In general.--For purposes of this section, 
        the term `specified foreign corporation' means--
                    ``(A) any controlled foreign corporation, 
                and
                    ``(B) any foreign corporation with respect 
                to which one or more domestic corporations is a 
                United States shareholder.
            ``(2) Application to certain foreign 
        corporations.--For purposes of sections 951 and 961, a 
        foreign corporation described in paragraph (1)(B) shall 
        be treated as a controlled foreign corporation solely 
        for purposes of taking into account the subpart F 
        income of such corporation under subsection (a) (and 
        for purposes of applying subsection (f)).
            ``(3) Exclusion of passive foreign investment 
        companies.--Such term shall not include any corporation 
        which is a passive foreign investment company (as 
        defined in section 1297) with respect to the 
        shareholder and which is not a controlled foreign 
        corporation.
    ``(f) Determinations of Pro Rata Share.--
            ``(1) In general.--For purposes of this section, 
        the determination of any United States shareholder's 
        pro rata share of any amount with respect to any 
        specified foreign corporation shall be determined under 
        rules similar to the rules of section 951(a)(2) by 
        treating such amount in the same manner as subpart F 
        income (and by treating such specified foreign 
        corporation as a controlled foreign corporation).
            ``(2) Special rules.--The portion which is included 
        in the income of a United States shareholder under 
        section 951(a)(1) by reason of subsection (a) which is 
        equal to the deduction allowed under subsection (c) by 
        reason of such inclusion--
                    ``(A) shall be treated as income exempt 
                from tax for purposes of sections 705(a)(1)(B) 
                and 1367(a)(1)(A), and
                    ``(B) shall not be treated as income exempt 
                from tax for purposes of determining whether an 
                adjustment shall be made to an accumulated 
                adjustment account under section 1368(e)(1)(A).
    ``(g) Disallowance of Foreign Tax Credit, etc.--
            ``(1) In general.--No credit shall be allowed under 
        section 901 for the applicable percentage of any taxes 
        paid or accrued (or treated as paid or accrued) with 
        respect to any amount for which a deduction is allowed 
        under this section.
            ``(2) Applicable percentage.--For purposes of this 
        subsection, the term `applicable percentage' means the 
        amount (expressed as a percentage) equal to the sum 
        of--
                    ``(A) 0.771 multiplied by the ratio of--
                            ``(i) the excess to which 
                        subsection (c)(1)(A) applies, divided 
                        by
                            ``(ii) the sum of such excess plus 
                        the amount to which subsection 
                        (c)(1)(B) applies, plus
                    ``(B) 0.557 multiplied by the ratio of--
                            ``(i) the amount to which 
                        subsection (c)(1)(B) applies, divided 
                        by
                            ``(ii) the sum described in 
                        subparagraph (A)(ii).
            ``(3) Denial of deduction.--No deduction shall be 
        allowed under this chapter for any tax for which credit 
        is not allowable under section 901 by reason of 
        paragraph (1) (determined by treating the taxpayer as 
        having elected the benefits of subpart A of part III of 
        subchapter N).
            ``(4) Coordination with section 78.--With respect 
        to the taxes treated as paid or accrued by a domestic 
        corporation with respect to amounts which are 
        includible in gross income of such domestic corporation 
        by reason of this section, section 78 shall apply only 
        to so much of such taxes as bears the same proportion 
        to the amount of such taxes as--
                    ``(A) the excess of--
                            ``(i) the amounts which are 
                        includible in gross income of such 
                        domestic corporation by reason of this 
                        section, over
                            ``(ii) the deduction allowable 
                        under subsection (c) with respect to 
                        such amounts, bears to
                    ``(B) such amounts.
    ``(h) Election to Pay Liability in Installments.--
            ``(1) In general.--In the case of a United States 
        shareholder of a deferred foreign income corporation, 
        such United States shareholder may elect to pay the net 
        tax liability under this section in 8 installments of 
        the following amounts:
                    ``(A) 8 percent of the net tax liability in 
                the case of each of the first 5 of such 
                installments,
                    ``(B) 15 percent of the net tax liability 
                in the case of the 6th such installment,
                    ``(C) 20 percent of the net tax liability 
                in the case of the 7th such installment, and
                    ``(D) 25 percent of the net tax liability 
                in the case of the 8th such installment.
            ``(2) Date for payment of installments.--If an 
        election is made under paragraph (1), the first 
        installment shall be paid on the due date (determined 
        without regard to any extension of time for filing the 
        return) for the return of tax for the taxable year 
        described in subsection (a) and each succeeding 
        installment shall be paid on the due date (as so 
        determined) for the return of tax for the taxable year 
        following the taxable year with respect to which the 
        preceding installment was made.
            ``(3) Acceleration of payment.--If there is an 
        addition to tax for failure to timely pay any 
        installment required under this subsection, a 
        liquidation or sale of substantially all the assets of 
        the taxpayer (including in a title 11 or similar case), 
        a cessation of business by the taxpayer, or any similar 
        circumstance, then the unpaid portion of all remaining 
        installments shall be due on the date of such event (or 
        in the case of a title 11 or similar case, the day 
        before the petition is filed). The preceding sentence 
        shall not apply to the sale of substantially all the 
        assets of a taxpayer to a buyer if such buyer enters 
        into an agreement with the Secretary under which such 
        buyer is liable for the remaining installments due 
        under this subsection in the same manner as if such 
        buyer were the taxpayer.
            ``(4) Proration of deficiency to installments.--If 
        an election is made under paragraph (1) to pay the net 
        tax liability under this section in installments and a 
        deficiency has been assessed with respect to such net 
        tax liability, the deficiency shall be prorated to the 
        installments payable under paragraph (1). The part of 
        the deficiency so prorated to any installment the date 
        for payment of which has not arrived shall be collected 
        at the same time as, and as a part of, such 
        installment. The part of the deficiency so prorated to 
        any installment the date for payment of which has 
        arrived shall be paid upon notice and demand from the 
        Secretary. This subsection shall not apply if the 
        deficiency is due to negligence, to intentional 
        disregard of rules and regulations, or to fraud with 
        intent to evade tax.
            ``(5) Election.--Any election under paragraph (1) 
        shall be made not later than the due date for the 
        return of tax for the taxable year described in 
        subsection (a) and shall be made in such manner as the 
        Secretary shall provide.
            ``(6) Net tax liability under this section.--For 
        purposes of this subsection--
                    ``(A) In general.--The net tax liability 
                under this section with respect to any United 
                States shareholder is the excess (if any) of--
                            ``(i) such taxpayer's net income 
                        tax for the taxable year in which an 
                        amount is included in the gross income 
                        of such United States shareholder under 
                        section 951(a)(1) by reason of this 
                        section, over
                            ``(ii) such taxpayer's net income 
                        tax for such taxable year determined--
                                    ``(I) without regard to 
                                this section, and
                                    ``(II) without regard to 
                                any income or deduction 
                                properly attributable to a 
                                dividend received by such 
                                United States shareholder from 
                                any deferred foreign income 
                                corporation.
                    ``(B) Net income tax.--The term `net income 
                tax' means the regular tax liability reduced by 
                the credits allowed under subparts A, B, and D 
                of part IV of subchapter A.
    ``(i) Special Rules for S Corporation Shareholders.--
            ``(1) In general.--In the case of any S corporation 
        which is a United States shareholder of a deferred 
        foreign income corporation, each shareholder of such S 
        corporation may elect to defer payment of such 
        shareholder's net tax liability under this section with 
        respect to such S corporation until the shareholder's 
        taxable year which includes the triggering event with 
        respect to such liability. Any net tax liability 
        payment of which is deferred under the preceding 
        sentence shall be assessed on the return of tax as an 
        addition to tax in the shareholder's taxable year which 
        includes such triggering event.
            ``(2) Triggering event.--
                    ``(A) In general.--In the case of any 
                shareholder's net tax liability under this 
                section with respect to any S corporation, the 
                triggering event with respect to such liability 
                is whichever of the following occurs first:
                            ``(i) Such corporation ceases to be 
                        an S corporation (determined as of the 
                        first day of the first taxable year 
                        that such corporation is not an S 
                        corporation).
                            ``(ii) A liquidation or sale of 
                        substantially all the assets of such S 
                        corporation (including in a title 11 or 
                        similar case), a cessation of business 
                        by such S corporation, such S 
                        corporation ceases to exist, or any 
                        similar circumstance.
                            ``(iii) A transfer of any share of 
                        stock in such S corporation by the 
                        taxpayer (including by reason of death, 
                        or otherwise).
                    ``(B) Partial transfers of stock.--In the 
                case of a transfer of less than all of the 
                taxpayer's shares of stock in the S 
                corporation, such transfer shall only be a 
                triggering event with respect to so much of the 
                taxpayer's net tax liability under this section 
                with respect to such S corporation as is 
                properly allocable to such stock.
                    ``(C) Transfer of liability.--A transfer 
                described in clause (iii) of subparagraph (A) 
                shall not be treated as a triggering event if 
                the transferee enters into an agreement with 
                the Secretary under which such transferee is 
                liable for net tax liability with respect to 
                such stock in the same manner as if such 
                transferee were the taxpayer.
            ``(3) Net tax liability.--A shareholder's net tax 
        liability under this section with respect to any S 
        corporation is the net tax liability under this section 
        which would be determined under subsection (h)(6) if 
        the only subpart F income taken into account by such 
        shareholder by reason of this section were allocations 
        from such S corporation.
            ``(4) Election to pay deferred liability in 
        installments.--In the case of a taxpayer which elects 
        to defer payment under paragraph (1)--
                    ``(A) subsection (h) shall be applied 
                separately with respect to the liability to 
                which such election applies,
                    ``(B) an election under subsection (h) with 
                respect to such liability shall be treated as 
                timely made if made not later than the due date 
                for the return of tax for the taxable year in 
                which the triggering event with respect to such 
                liability occurs,
                    ``(C) the first installment under 
                subsection (h) with respect to such liability 
                shall be paid not later than such due date (but 
                determined without regard to any extension of 
                time for filing the return), and
                    ``(D) if the triggering event with respect 
                to any net tax liability is described in 
                paragraph (2)(A)(ii), an election under 
                subsection (h) with respect to such liability 
                may be made only with the consent of the 
                Secretary.
            ``(5) Joint and several liability of s 
        corporation.--If any shareholder of an S corporation 
        elects to defer payment under paragraph (1), such S 
        corporation shall be jointly and severally liable for 
        such payment and any penalty, addition to tax, or 
        additional amount attributable thereto.
            ``(6) Extension of limitation on collection.--Any 
        limitation on the time period for the collection of a 
        liability deferred under this subsection shall not be 
        treated as beginning before the date of the triggering 
        event with respect to such liability.
            ``(7) Annual reporting of net tax liability.--
                    ``(A) In general.--Any shareholder of an S 
                corporation which makes an election under 
                paragraph (1) shall report the amount of such 
                shareholder's deferred net tax liability on 
                such shareholder's return of tax for the 
                taxable year for which such election is made 
                and on the return of tax for each taxable year 
                thereafter until such amount has been fully 
                assessed on such returns.
                    ``(B) Deferred net tax liability.--For 
                purposes of this paragraph, the term `deferred 
                net tax liability' means, with respect to any 
                taxable year, the amount of net tax liability 
                payment of which has been deferred under 
                paragraph (1) and which has not been assessed 
                on a return of tax for any prior taxable year.
                    ``(C) Failure to report.--In the case of 
                any failure to report any amount required to be 
                reported under subparagraph (A) with respect to 
                any taxable year before the due date for the 
                return of tax for such taxable year, there 
                shall be assessed on such return as an addition 
                to tax 5 percent of such amount.
            ``(8) Election.--Any election under paragraph (1)--
                    ``(A) shall be made by the shareholder of 
                the S corporation not later than the due date 
                for such shareholder's return of tax for the 
                taxable year which includes the close of the 
                taxable year of such S corporation in which the 
                amount described in subsection (a) is taken 
                into account, and
                    ``(B) shall be made in such manner as the 
                Secretary shall provide.
    ``(j) Reporting by S Corporation.--Each S corporation which 
is a United States shareholder of a specified foreign 
corporation shall report in its return of tax under section 
6037(a) the amount includible in its gross income for such 
taxable year by reason of this section and the amount of the 
deduction allowable by subsection (c). Any copy provided to a 
shareholder under section 6037(b) shall include a statement of 
such shareholder's pro rata share of such amounts.
    ``(k) Extension of Limitation on Assessment.--
Notwithstanding section 6501, the limitation on the time period 
for the assessment of the net tax liability under this section 
(as defined in subsection (h)(6)) shall not expire before the 
date that is 6 years after the return for the taxable year 
described in such subsection was filed.
    ``(l) Recapture for Expatriated Entities.--
            ``(1) In general.--If a deduction is allowed under 
        subsection (c) to a United States shareholder and such 
        shareholder first becomes an expatriated entity at any 
        time during the 10-year period beginning on the date of 
        the enactment of the Tax Cuts and Jobs Act (with 
        respect to a surrogate foreign corporation which first 
        becomes a surrogate foreign corporation during such 
        period), then--
                    ``(A) the tax imposed by this chapter shall 
                be increased for the first taxable year in 
                which such taxpayer becomes an expatriated 
                entity by an amount equal to 35 percent of the 
                amount of the deduction allowed under 
                subsection (c), and
                    ``(B) no credits shall be allowed against 
                the increase in tax under subparagraph (A).
            ``(2) Expatriated entity.--For purposes of this 
        subsection, the term `expatriated entity' has the same 
        meaning given such term under section 7874(a)(2), 
        except that such term shall not include an entity if 
        the surrogate foreign corporation with respect to the 
        entity is treated as a domestic corporation under 
        section 7874(b).
            ``(3) Surrogate foreign corporation.--For purposes 
        of this subsection, the term `surrogate foreign 
        corporation' has the meaning given such term in section 
        7874(a)(2)(B).
    ``(m) Special Rules for United States Shareholders Which 
Are Real Estate Investment Trusts.--
            ``(1) In general.--If a real estate investment 
        trust is a United States shareholder in 1 or more 
        deferred foreign income corporations--
                    ``(A) any amount required to be taken into 
                account under section 951(a)(1) by reason of 
                this section shall not be taken into account as 
                gross income of the real estate investment 
                trust for purposes of applying paragraphs (2) 
                and (3) of section 856(c) to any taxable year 
                for which such amount is taken into account 
                under section 951(a)(1), and
                    ``(B) if the real estate investment trust 
                elects the application of this subparagraph, 
                notwithstanding subsection (a), any amount 
                required to be taken into account under section 
                951(a)(1) by reason of this section shall, in 
                lieu of the taxable year in which it would 
                otherwise be included in gross income (for 
                purposes of the computation of real estate 
                investment trust taxable income under section 
                857(b)), be included in gross income as 
                follows:
                            ``(i) 8 percent of such amount in 
                        the case of each of the taxable years 
                        in the 5-taxable year period beginning 
                        with the taxable year in which such 
                        amount would otherwise be included.
                            ``(ii) 15 percent of such amount in 
                        the case of the 1st taxable year 
                        following such period.
                            ``(iii) 20 percent of such amount 
                        in the case of the 2nd taxable year 
                        following such period.
                            ``(iv) 25 percent of such amount in 
                        the case of the 3rd taxable year 
                        following such period.
            ``(2) Rules for trusts electing deferred 
        inclusion.--
                    ``(A) Election.--Any election under 
                paragraph (1)(B) shall be made not later than 
                the due date for the first taxable year in the 
                5-taxable year period described in clause (i) 
                of paragraph (1)(B) and shall be made in such 
                manner as the Secretary shall provide.
                    ``(B) Special rules.--If an election under 
                paragraph (1)(B) is in effect with respect to 
                any real estate investment trust, the following 
                rules shall apply:
                            ``(i) Application of participation 
                        exemption.--For purposes of subsection 
                        (c)(1)--
                                    ``(I) the aggregate amount 
                                to which subparagraph (A) or 
                                (B) of subsection (c)(1) 
                                applies shall be determined 
                                without regard to the election,
                                    ``(II) each such aggregate 
                                amount shall be allocated to 
                                each taxable year described in 
                                paragraph (1)(B) in the same 
                                proportion as the amount 
                                included in the gross income of 
                                such United States shareholder 
                                under section 951(a)(1) by 
                                reason of this section is 
                                allocated to each such taxable 
                                year.
                                    ``(III) No installment 
                                payments.--The real estate 
                                investment trust may not make 
                                an election under subsection 
                                (g) for any taxable year 
                                described in paragraph (1)(B).
                            ``(ii) Acceleration of inclusion.--
                        If there is a liquidation or sale of 
                        substantially all the assets of the 
                        real estate investment trust (including 
                        in a title 11 or similar case), a 
                        cessation of business by such trust, or 
                        any similar circumstance, then any 
                        amount not yet included in gross income 
                        under paragraph (1)(B) shall be 
                        included in gross income as of the day 
                        before the date of the event and the 
                        unpaid portion of any tax liability 
                        with respect to such inclusion shall be 
                        due on the date of such event (or in 
                        the case of a title 11 or similar case, 
                        the day before the petition is filed).
    ``(n) Election Not to Apply Net Operating Loss Deduction.--
            ``(1) In general.--If a United States shareholder 
        of a deferred foreign income corporation elects the 
        application of this subsection for the taxable year 
        described in subsection (a), then the amount described 
        in paragraph (2) shall not be taken into account--
                    ``(A) in determining the amount of the net 
                operating loss deduction under section 172 of 
                such shareholder for such taxable year, or
                    ``(B) in determining the amount of taxable 
                income for such taxable year which may be 
                reduced by net operating loss carryovers or 
                carrybacks to such taxable year under section 
                172.
            ``(2) Amount described.--The amount described in 
        this paragraph is the sum of--
                    ``(A) the amount required to be taken into 
                account under section 951(a)(1) by reason of 
                this section (determined after the application 
                of subsection (c)), plus
                    ``(B) in the case of a domestic corporation 
                which chooses to have the benefits of subpart A 
                of part III of subchapter N for the taxable 
                year, the taxes deemed to be paid by such 
                corporation under subsections (a) and (b) of 
                section 960 for such taxable year with respect 
                to the amount described in subparagraph (A) 
                which are treated as a dividends under section 
                78.
            ``(3) Election.--Any election under this subsection 
        shall be made not later than the due date (including 
        extensions) for filing the return of tax for the 
        taxable year and shall be made in such manner as the 
        Secretary shall prescribe.
    ``(o) Regulations.--The Secretary shall prescribe such 
regulations or other guidance as may be necessary or 
appropriate to carry out the provisions of this section, 
including--
            ``(1) regulations or other guidance to provide 
        appropriate basis adjustments, and
            ``(2) regulations or other guidance to prevent the 
        avoidance of the purposes of this section, including 
        through a reduction in earnings and profits, through 
        changes in entity classification or accounting methods, 
        or otherwise.''.
    (b) Clerical Amendment.--The table of sections for subpart 
F of part III of subchapter N of chapter 1 is amended by 
striking the item relating to section 965 and inserting the 
following:

``Sec. 965. Treatment of deferred foreign income upon transition to 
          participation exemption system of taxation.''.

         Subpart B--Rules Related to Passive and Mobile Income

  CHAPTER 1--TAXATION OF FOREIGN-DERIVED INTANGIBLE INCOME AND GLOBAL 
                      INTANGIBLE LOW-TAXED INCOME

SEC. 14201. CURRENT YEAR INCLUSION OF GLOBAL INTANGIBLE LOW-TAXED 
                    INCOME BY UNITED STATES SHAREHOLDERS.

    (a) In General.--Subpart F of part III of subchapter N of 
chapter 1 is amended by inserting after section 951 the 
following new section:

``SEC. 951A. GLOBAL INTANGIBLE LOW-TAXED INCOME INCLUDED IN GROSS 
                    INCOME OF UNITED STATES SHAREHOLDERS.

    ``(a) In General.--Each person who is a United States 
shareholder of any controlled foreign corporation for any 
taxable year of such United States shareholder shall include in 
gross income such shareholder's global intangible low-taxed 
income for such taxable year.
    ``(b) Global Intangible Low-taxed Income.--For purposes of 
this section--
            ``(1) In general.--The term `global intangible low-
        taxed income' means, with respect to any United States 
        shareholder for any taxable year of such United States 
        shareholder, the excess (if any) of--
                    ``(A) such shareholder's net CFC tested 
                income for such taxable year, over
                    ``(B) such shareholder's net deemed 
                tangible income return for such taxable year.
            ``(2) Net deemed tangible income return.--The term 
        `net deemed tangible income return' means, with respect 
        to any United States shareholder for any taxable year, 
        the excess of--
                    ``(A) 10 percent of the aggregate of such 
                shareholder's pro rata share of the qualified 
                business asset investment of each controlled 
                foreign corporation with respect to which such 
                shareholder is a United States shareholder for 
                such taxable year (determined for each taxable 
                year of each such controlled foreign 
                corporation which ends in or with such taxable 
                year of such United States shareholder), over
                    ``(B) the amount of interest expense taken 
                into account under subsection (c)(2)(A)(ii) in 
                determining the shareholder's net CFC tested 
                income for the taxable year to the extent the 
                interest income attributable to such expense is 
                not taken into account in determining such 
                shareholder's net CFC tested income.
    ``(c) Net CFC Tested Income.--For purposes of this 
section--
            ``(1) In general.--The term `net CFC tested income' 
        means, with respect to any United States shareholder 
        for any taxable year of such United States shareholder, 
        the excess (if any) of--
                    ``(A) the aggregate of such shareholder's 
                pro rata share of the tested income of each 
                controlled foreign corporation with respect to 
                which such shareholder is a United States 
                shareholder for such taxable year of such 
                United States shareholder (determined for each 
                taxable year of such controlled foreign 
                corporation which ends in or with such taxable 
                year of such United States shareholder), over
                    ``(B) the aggregate of such shareholder's 
                pro rata share of the tested loss of each 
                controlled foreign corporation with respect to 
                which such shareholder is a United States 
                shareholder for such taxable year of such 
                United States shareholder (determined for each 
                taxable year of such controlled foreign 
                corporation which ends in or with such taxable 
                year of such United States shareholder).
            ``(2) Tested income; tested loss.--For purposes of 
        this section--
                    ``(A) Tested income.--The term `tested 
                income' means, with respect to any controlled 
                foreign corporation for any taxable year of 
                such controlled foreign corporation, the excess 
                (if any) of--
                            ``(i) the gross income of such 
                        corporation determined without regard 
                        to--
                                    ``(I) any item of income 
                                described in section 952(b),
                                    ``(II) any gross income 
                                taken into account in 
                                determining the subpart F 
                                income of such corporation,
                                    ``(III) any gross income 
                                excluded from the foreign base 
                                company income (as defined in 
                                section 954) and the insurance 
                                income (as defined in section 
                                953) of such corporation by 
                                reason of section 954(b)(4),
                                    ``(IV) any dividend 
                                received from a related person 
                                (as defined in section 
                                954(d)(3)), and
                                    ``(V) any foreign oil and 
                                gas extraction income (as 
                                defined in section 907(c)(1)) 
                                of such corporation, over
                            ``(ii) the deductions (including 
                        taxes) properly allocable to such gross 
                        income under rules similar to the rules 
                        of section 954(b)(5) (or to which such 
                        deductions would be allocable if there 
                        were such gross income).
                    ``(B) Tested loss.--
                            ``(i) In general.--The term `tested 
                        loss' means, with respect to any 
                        controlled foreign corporation for any 
                        taxable year of such controlled foreign 
                        corporation, the excess (if any) of the 
                        amount described in subparagraph 
                        (A)(ii) over the amount described in 
                        subparagraph (A)(i).
                            ``(ii) Coordination with subpart f 
                        to deny double benefit of losses.--
                        Section 952(c)(1)(A) shall be applied 
                        by increasing the earnings and profits 
                        of the controlled foreign corporation 
                        by the tested loss of such corporation.
    ``(d) Qualified Business Asset Investment.--For purposes of 
this section--
            ``(1) In general.--The term `qualified business 
        asset investment' means, with respect to any controlled 
        foreign corporation for any taxable year, the average 
        of such corporation's aggregate adjusted bases as of 
        the close of each quarter of such taxable year in 
        specified tangible property--
                    ``(A) used in a trade or business of the 
                corporation, and
                    ``(B) of a type with respect to which a 
                deduction is allowable under section 167.
            ``(2) Specified tangible property.--
                    ``(A) In general.--The term `specified 
                tangible property' means, except as provided in 
                subparagraph (B), any tangible property used in 
                the production of tested income.
                    ``(B) Dual use property.--In the case of 
                property used both in the production of tested 
                income and income which is not tested income, 
                such property shall be treated as specified 
                tangible property in the same proportion that 
                the gross income described in subsection 
                (c)(1)(A) produced with respect to such 
                property bears to the total gross income 
                produced with respect to such property.
            ``(3) Determination of adjusted basis.--For 
        purposes of this subsection, notwithstanding any 
        provision of this title (or any other provision of law) 
        which is enacted after the date of the enactment of 
        this section, the adjusted basis in any property shall 
        be determined--
                    ``(A) by using the alternative depreciation 
                system under section 168(g), and
                    ``(B) by allocating the depreciation 
                deduction with respect to such property ratably 
                to each day during the period in the taxable 
                year to which such depreciation relates.
            ``(3) Partnership property.--For purposes of this 
        subsection, if a controlled foreign corporation holds 
        an interest in a partnership at the close of such 
        taxable year of the controlled foreign corporation, 
        such controlled foreign corporation shall take into 
        account under paragraph (1) the controlled foreign 
        corporation's distributive share of the aggregate of 
        the partnership's adjusted bases (determined as of such 
        date in the hands of the partnership) in tangible 
        property held by such partnership to the extent such 
        property--
                    ``(A) is used in the trade or business of 
                the partnership,
                    ``(B) is of a type with respect to which a 
                deduction is allowable under section 167, and
                    ``(C) is used in the production of tested 
                income (determined with respect to such 
                controlled foreign corporation's distributive 
                share of income with respect to such property).
        For purposes of this paragraph, the controlled foreign 
        corporation's distributive share of the adjusted basis 
        of any property shall be the controlled foreign 
        corporation's distributive share of income with respect 
        to such property.
            ``(4) Regulations.--The Secretary shall issue such 
        regulations or other guidance as the Secretary 
        determines appropriate to prevent the avoidance of the 
        purposes of this subsection, including regulations or 
        other guidance which provide for the treatment of 
        property if--
                    ``(A) such property is transferred, or 
                held, temporarily, or
                    ``(B) the avoidance of the purposes of this 
                paragraph is a factor in the transfer or 
                holding of such property.
    ``(e) Determination of Pro Rata Share, etc.--For purposes 
of this section--
            ``(1) In general.--The pro rata shares referred to 
        in subsections (b), (c)(1)(A), and (c)(1)(B), 
        respectively, shall be determined under the rules of 
        section 951(a)(2) in the same manner as such section 
        applies to subpart F income and shall be taken into 
        account in the taxable year of the United States 
        shareholder in which or with which the taxable year of 
        the controlled foreign corporation ends.
            ``(2) Treatment as united states shareholder.--A 
        person shall be treated as a United States shareholder 
        of a controlled foreign corporation for any taxable 
        year of such person only if such person owns (within 
        the meaning of section 958(a)) stock in such foreign 
        corporation on the last day in the taxable year of such 
        foreign corporation on which such foreign corporation 
        is a controlled foreign corporation.
            ``(3) Treatment as controlled foreign 
        corporation.--A foreign corporation shall be treated as 
        a controlled foreign corporation for any taxable year 
        if such foreign corporation is a controlled foreign 
        corporation at any time during such taxable year.
    ``(f) Treatment as Subpart F Income for Certain Purposes.--
            ``(1) In general.--
                    ``(A) Application.--Except as provided in 
                subparagraph (B), any global intangible low-
                taxed income included in gross income under 
                subsection (a) shall be treated in the same 
                manner as an amount included under section 
                951(a)(1)(A) for purposes of applying sections 
                168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 
                959, 961, 962, 993(a)(1)(E), 996(f)(1), 
                1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 
                6654(d)(2)(D), and 6655(e)(4).
                    ``(B) Exception.--The Secretary shall 
                provide rules for the application of 
                subparagraph (A) to other provisions of this 
                title in any case in which the determination of 
                subpart F income is required to be made at the 
                level of the controlled foreign corporation.
            ``(2) Allocation of global intangible low-taxed 
        income to controlled foreign corporations.--For 
        purposes of the sections referred to in paragraph (1), 
        with respect to any controlled foreign corporation any 
        pro rata amount from which is taken into account in 
        determining the global intangible low-taxed income 
        included in gross income of a United States shareholder 
        under subsection (a), the portion of such global 
        intangible low-taxed income which is treated as being 
        with respect to such controlled foreign corporation 
        is--
                    ``(A) in the case of a controlled foreign 
                corporation with no tested income, zero, and
                    ``(B) in the case of a controlled foreign 
                corporation with tested income, the portion of 
                such global intangible low-taxed income which 
                bears the same ratio to such global intangible 
                low-taxed income as--
                            ``(i) such United States 
                        shareholder's pro rata amount of the 
                        tested income of such controlled 
                        foreign corporation, bears to
                            ``(ii) the aggregate amount 
                        described in subsection (c)(1)(A) with 
                        respect to such United States 
                        shareholder.''.
    (b) Foreign Tax Credit.--
            (1) Application of deemed paid foreign tax 
        credit.--Section 960 is amended adding at the end the 
        following new subsection:
    ``(d) Deemed Paid Credit for Taxes Properly Attributable to 
Tested Income.--
            ``(1) In general.--For purposes of subpart A of 
        this part, if any amount is includible in the gross 
        income of a domestic corporation under section 951A, 
        such domestic corporation shall be deemed to have paid 
        foreign income taxes equal to 80 percent of the product 
        of--
                    ``(A) such domestic corporation's inclusion 
                percentage, multiplied by
                    ``(B) the aggregate tested foreign income 
                taxes paid or accrued by controlled foreign 
                corporations.
            ``(2) Inclusion percentage.--For purposes of 
        paragraph (1), the term `inclusion percentage' means, 
        with respect to any domestic corporation, the ratio 
        (expressed as a percentage) of--
                    ``(A) such corporation's global intangible 
                low-taxed income (as defined in section 
                951A(b)), divided by
                    ``(B) the aggregate amount described in 
                section 951A(c)(1)(A) with respect to such 
                corporation.
            ``(3) Tested foreign income taxes.--For purposes of 
        paragraph (1), the term `tested foreign income taxes' 
        means, with respect to any domestic corporation which 
        is a United States shareholder of a controlled foreign 
        corporation, the foreign income taxes paid or accrued 
        by such foreign corporation which are properly 
        attributable to the tested income of such foreign 
        corporation taken into account by such domestic 
        corporation under section 951A.''.
            (2) Application of foreign tax credit limitation.--
                    (A) Separate basket for global intangible 
                low-taxed income.--Section 904(d)(1) is amended 
                by redesignating subparagraphs (A) and (B) as 
                subparagraphs (B) and (C), respectively, and by 
                inserting before subparagraph (B) (as so 
                redesignated) the following new subparagraph:
                    ``(A) any amount includible in gross income 
                under section 951A (other than passive category 
                income),''.
                    (B) Exclusion from general category 
                income.--Section 904(d)(2)(A)(ii) is amended by 
                inserting ``income described in paragraph 
                (1)(A) and'' before ``passive category 
                income''.
                    (C) No carryover or carryback of excess 
                taxes.--Section 904(c) is amended by adding at 
                the end the following: ``This subsection shall 
                not apply to taxes paid or accrued with respect 
                to amounts described in subsection 
                (d)(1)(A).''.
    (c) Clerical Amendment.--The table of sections for subpart 
F of part III of subchapter N of chapter 1 is amended by 
inserting after the item relating to section 951 the following 
new item:

``Sec. 951A. Global intangible low-taxed income included in gross income 
          of United States shareholders.''.

    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years of foreign corporations beginning 
after December 31, 2017, and to taxable years of United States 
shareholders in which or with which such taxable years of 
foreign corporations end.

SEC. 14202. DEDUCTION FOR FOREIGN-DERIVED INTANGIBLE INCOME AND GLOBAL 
                    INTANGIBLE LOW-TAXED INCOME.

    (a) In General.--Part VIII of subchapter B of chapter 1 is 
amended by adding at the end the following new section:

``SEC. 250. FOREIGN-DERIVED INTANGIBLE INCOME AND GLOBAL INTANGIBLE 
                    LOW-TAXED INCOME.

    ``(a) Allowance of Deduction.--
            ``(1) In general.--In the case of a domestic 
        corporation for any taxable year, there shall be 
        allowed as a deduction an amount equal to the sum of--
                    ``(A) 37.5 percent of the foreign-derived 
                intangible income of such domestic corporation 
                for such taxable year, plus
                    ``(B) 50 percent of--
                            ``(i) the global intangible low-
                        taxed income amount (if any) which is 
                        included in the gross income of such 
                        domestic corporation under section 951A 
                        for such taxable year, and
                            ``(ii) the amount treated as a 
                        dividend received by such corporation 
                        under section 78 which is attributable 
                        to the amount described in clause (i).
            ``(2) Limitation based on taxable income.--
                    ``(A) In general.--If, for any taxable 
                year--
                            ``(i) the sum of the foreign-
                        derived intangible income and the 
                        global intangible low-taxed income 
                        amount otherwise taken into account by 
                        the domestic corporation under 
                        paragraph (1), exceeds
                            ``(ii) the taxable income of the 
                        domestic corporation (determined 
                        without regard to this section),
                then the amount of the foreign-derived 
                intangible income and the global intangible 
                low-taxed income amount so taken into account 
                shall be reduced as provided in subparagraph 
                (B).
                    ``(B) Reduction.--For purposes of 
                subparagraph (A)--
                            ``(i) foreign-derived intangible 
                        income shall be reduced by an amount 
                        which bears the same ratio to the 
                        excess described in subparagraph (A) as 
                        such foreign-derived intangible income 
                        bears to the sum described in 
                        subparagraph (A)(i), and
                            ``(ii) the global intangible low-
                        taxed income amount shall be reduced by 
                        the remainder of such excess.
            ``(3) Reduction in deduction for taxable years 
        after 2025.--In the case of any taxable year beginning 
        after December 31, 2025, paragraph (1) shall be applied 
        by substituting--
                    ``(A) `21.875 percent' for `37.5 percent' 
                in subparagraph (A), and
                    ``(B) `37.5 percent' for `50 percent' in 
                subparagraph (B).
    ``(b) Foreign-derived Intangible Income.--For purposes of 
this section--
            ``(1) In general.--The foreign-derived intangible 
        income of any domestic corporation is the amount which 
        bears the same ratio to the deemed intangible income of 
        such corporation as--
                    ``(A) the foreign-derived deduction 
                eligible income of such corporation, bears to
                    ``(B) the deduction eligible income of such 
                corporation.
            ``(2) Deemed intangible income.--For purposes of 
        this subsection--
                    ``(A) In general.--The term `deemed 
                intangible income' means the excess (if any) 
                of--
                            ``(i) the deduction eligible income 
                        of the domestic corporation, over
                            ``(ii) the deemed tangible income 
                        return of the corporation.
                    ``(B) Deemed tangible income return.--The 
                term `deemed tangible income return' means, 
                with respect to any corporation, an amount 
                equal to 10 percent of the corporation's 
                qualified business asset investment (as defined 
                in section 951A(d), determined by substituting 
                `deduction eligible income' for `tested income' 
                in paragraph (2) thereof and without regard to 
                whether the corporation is a controlled foreign 
                corporation).
            ``(3) Deduction eligible income.--
                    ``(A) In general.--The term `deduction 
                eligible income' means, with respect to any 
                domestic corporation, the excess (if any) of--
                            ``(i) gross income of such 
                        corporation determined without regard 
                        to--
                                    ``(I) any amount included 
                                in the gross income of such 
                                corporation under section 
                                951(a)(1),
                                    ``(II) the global 
                                intangible low-taxed income 
                                included in the gross income of 
                                such corporation under section 
                                951A,
                                    ``(III) any financial 
                                services income (as defined in 
                                section 904(d)(2)(D)) of such 
                                corporation,
                                    ``(IV) any dividend 
                                received from a corporation 
                                which is a controlled foreign 
                                corporation of such domestic 
                                corporation,
                                    ``(V) any domestic oil and 
                                gas extraction income of such 
                                corporation, and
                                    ``(VI) any foreign branch 
                                income (as defined in section 
                                904(d)(2)(J)), over
                            ``(ii) the deductions (including 
                        taxes) properly allocable to such gross 
                        income.
                    ``(B) Domestic oil and gas extraction 
                income.--For purposes of subparagraph (A), the 
                term `domestic oil and gas extraction income' 
                means income described in section 907(c)(1), 
                determined by substituting `within the United 
                States' for `without the United States'.
            ``(4) Foreign-derived deduction eligible income.--
        The term `foreign-derived deduction eligible income' 
        means, with respect to any taxpayer for any taxable 
        year, any deduction eligible income of such taxpayer 
        which is derived in connection with--
                    ``(A) property--
                            ``(i) which is sold by the taxpayer 
                        to any person who is not a United 
                        States person, and
                            ``(ii) which the taxpayer 
                        establishes to the satisfaction of the 
                        Secretary is for a foreign use, or
                    ``(B) services provided by the taxpayer 
                which the taxpayer establishes to the 
                satisfaction of the Secretary are provided to 
                any person, or with respect to property, not 
                located within the United States.
            ``(5) Rules relating to foreign use property or 
        services.--For purposes of this subsection--
                    ``(A) Foreign use.--The term `foreign use' 
                means any use, consumption, or disposition 
                which is not within the United States.
                    ``(B) Property or services provided to 
                domestic intermediaries.--
                            ``(i) Property.--If a taxpayer 
                        sells property to another person (other 
                        than a related party) for further 
                        manufacture or other modification 
                        within the United States, such property 
                        shall not be treated as sold for a 
                        foreign use even if such other person 
                        subsequently uses such property for a 
                        foreign use.
                            ``(ii) Services.--If a taxpayer 
                        provides services to another person 
                        (other than a related party) located 
                        within the United States, such services 
                        shall not be treated as described in 
                        paragraph (4)(B) even if such other 
                        person uses such services in providing 
                        services which are so described.
                    ``(C) Special rules with respect to related 
                party transactions.--
                            ``(i) Sales to related parties.--If 
                        property is sold to a related party who 
                        is not a United States person, such 
                        sale shall not be treated as for a 
                        foreign use unless--
                                    ``(I) such property is 
                                ultimately sold by a related 
                                party, or used by a related 
                                party in connection with 
                                property which is sold or the 
                                provision of services, to 
                                another person who is an 
                                unrelated party who is not a 
                                United States person, and
                                    ``(II) the taxpayer 
                                establishes to the satisfaction 
                                of the Secretary that such 
                                property is for a foreign use.
                        For purposes of this clause, a sale of 
                        property shall be treated as a sale of 
                        each of the components thereof.
                            ``(ii) Service provided to related 
                        parties.--If a service is provided to a 
                        related party who is not located in the 
                        United States, such service shall not 
                        be treated described in subparagraph 
                        (A)(ii) unless the taxpayer established 
                        to the satisfaction of the Secretary 
                        that such service is not substantially 
                        similar to services provided by such 
                        related party to persons located within 
                        the United States.
                    ``(D) Related party.--For purposes of this 
                paragraph, the term `related party' means any 
                member of an affiliated group as defined in 
                section 1504(a), determined--
                            ``(i) by substituting `more than 50 
                        percent' for `at least 80 percent' each 
                        place it appears, and
                            ``(ii) without regard to paragraphs 
                        (2) and (3) of section 1504(b).
                Any person (other than a corporation) shall be 
                treated as a member of such group if such 
                person is controlled by members of such group 
                (including any entity treated as a member of 
                such group by reason of this sentence) or 
                controls any such member. For purposes of the 
                preceding sentence, control shall be determined 
                under the rules of section 954(d)(3).
                    ``(E) Sold.--For purposes of this 
                subsection, the terms `sold', `sells', and 
                `sale' shall include any lease, license, 
                exchange, or other disposition.
    ``(c) Regulations.--The Secretary shall prescribe such 
regulations or other guidance as may be necessary or 
appropriate to carry out the provisions of this section.''.
    (b) Conforming Amendments.--
            (1) Section 172(d), as amended by this Act, is 
        amended by adding at the end the following new 
        paragraph:
            ``(9) Deduction for foreign-derived intangible 
        income.--The deduction under section 250 shall not be 
        allowed.''.
            (2) Section 246(b)(1) is amended--
                    (A) by striking ``and subsection (a) and 
                (b) of section 245'' the first place it appears 
                and inserting ``, subsection (a) and (b) of 
                section 245, and section 250'',
                    (B) by striking ``and subsection (a) and 
                (b) of section 245'' the second place it 
                appears and inserting ``subsection (a) and (b) 
                of section 245, and 250''.
            (3) Section 469(i)(3)(F)(iii) is amended by 
        striking ``and 222'' and inserting ``222, and 250''.
            (4) The table of sections for part VIII of 
        subchapter B of chapter 1 is amended by adding at the 
        end the following new item:

``Sec. 250. Foreign-derived intangible income and global intangible low-
          taxed income.''.

    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

         CHAPTER 2--OTHER MODIFICATIONS OF SUBPART F PROVISIONS

SEC. 14211. ELIMINATION OF INCLUSION OF FOREIGN BASE COMPANY OIL 
                    RELATED INCOME.

    (a) Repeal.--Subsection (a) of section 954 is amended--
            (1) by inserting ``and'' at the end of paragraph 
        (2),
            (2) by striking the comma at the end of paragraph 
        (3) and inserting a period, and
            (3) by striking paragraph (5).
    (b) Conforming Amendments.--
            (1) Section 952(c)(1)(B)(iii) is amended by 
        striking subclause (I) and redesignating subclauses 
        (II) through (V) as subclauses (I) through (IV), 
        respectively.
            (2) Section 954(b) is amended--
                    (A) by striking the second sentence of 
                paragraph (4),
                    (B) by striking ``the foreign base company 
                services income, and the foreign base company 
                oil related income'' in paragraph (5) and 
                inserting ``and the foreign base company 
                services income'', and
                    (C) by striking paragraph (6).
            (3) Section 954 is amended by striking subsection 
        (g).
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years of foreign corporations beginning 
after December 31, 2017, and to taxable years of United States 
shareholders with or within which such taxable years of foreign 
corporations end.

SEC. 14212. REPEAL OF INCLUSION BASED ON WITHDRAWAL OF PREVIOUSLY 
                    EXCLUDED SUBPART F INCOME FROM QUALIFIED 
                    INVESTMENT.

    (a) In General.--Subpart F of part III of subchapter N of 
chapter 1 is amended by striking section 955.
    (b) Conforming Amendments.--
            (1)(A) Section 951(a)(1)(A) is amended to read as 
        follows:
                    ``(A) his pro rata share (determined under 
                paragraph (2)) of the corporation's subpart F 
                income for such year, and''.
            (B) Section 851(b) is amended by striking ``section 
        951(a)(1)(A)(i)'' in the flush language at the end and 
        inserting ``section 951(a)(1)(A)''.
            (C) Section 952(c)(1)(B)(i) is amended by striking 
        ``section 951(a)(1)(A)(i)'' and inserting ``section 
        951(a)(1)(A)''.
            (D) Section 953(c)(1)(C) is amended by striking 
        ``section 951(a)(1)(A)(i)'' and inserting ``section 
        951(a)(1)(A)''.
            (2) Section 951(a) is amended by striking paragraph 
        (3).
            (3) Section 953(d)(4)(B)(iv)(II) is amended by 
        striking ``or amounts referred to in clause (ii) or 
        (iii) of section 951(a)(1)(A)''.
            (4) Section 964(b) is amended by striking ``, 
        955,''.
            (5) Section 970 is amended by striking subsection 
        (b).
            (6) The table of sections for subpart F of part III 
        of subchapter N of chapter 1 is amended by striking the 
        item relating to section 955.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years of foreign corporations beginning 
after December 31, 2017, and to taxable years of United States 
shareholders in which or with which such taxable years of 
foreign corporations end.

SEC. 14213. MODIFICATION OF STOCK ATTRIBUTION RULES FOR DETERMINING 
                    STATUS AS A CONTROLLED FOREIGN CORPORATION.

    (a) In General.--Section 958(b) is amended--
            (1) by striking paragraph (4), and
            (2) by striking ``Paragraphs (1) and (4)'' in the 
        last sentence and inserting ``Paragraph (1)''.
    (b) Effective Date.--The amendments made by this section 
shall apply to--
            (1) the last taxable year of foreign corporations 
        beginning before January 1, 2018, and each subsequent 
        taxable year of such foreign corporations, and
            (2) taxable years of United States shareholders in 
        which or with which such taxable years of foreign 
        corporations end.

SEC. 14214. MODIFICATION OF DEFINITION OF UNITED STATES SHAREHOLDER.

    (a) In General.--Section 951(b) is amended by inserting ``, 
or 10 percent or more of the total value of shares of all 
classes of stock of such foreign corporation'' after ``such 
foreign corporation''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years of foreign corporations beginning 
after December 31, 2017, and to taxable years of United States 
shareholders with or within which such taxable years of foreign 
corporations end.

SEC. 14215. ELIMINATION OF REQUIREMENT THAT CORPORATION MUST BE 
                    CONTROLLED FOR 30 DAYS BEFORE SUBPART F INCLUSIONS 
                    APPLY.

    (a) In General.--Section 951(a)(1) is amended by striking 
``for an uninterrupted period of 30 days or more'' and 
inserting ``at any time''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years of foreign corporations beginning 
after December 31, 2017, and to taxable years of United States 
shareholders with or within which such taxable years of foreign 
corporations end.

                 CHAPTER 3--PREVENTION OF BASE EROSION

SEC. 14221. LIMITATIONS ON INCOME SHIFTING THROUGH INTANGIBLE PROPERTY 
                    TRANSFERS.

    (a) Definition of Intangible Asset.--Section 936(h)(3)(B) 
is amended--
            (1) by striking ``or'' at the end of clause (v),
            (2) by striking clause (vi) and inserting the 
        following:
                            ``(vi) any goodwill, going concern 
                        value, or workforce in place (including 
                        its composition and terms and 
                        conditions (contractual or otherwise) 
                        of its employment); or
                            ``(vii) any other item the value or 
                        potential value of which is not 
                        attributable to tangible property or 
                        the services of any individual.'', and
            (3) by striking the flush language after clause 
        (vii), as added by paragraph (2).
    (b) Clarification of Allowable Valuation Methods.--
            (1) Foreign corporations.--Section 367(d)(2) is 
        amended by adding at the end the following new 
        subparagraph:
                    ``(D) Regulatory authority.--For purposes 
                of the last sentence of subparagraph (A), the 
                Secretary shall require--
                            ``(i) the valuation of transfers of 
                        intangible property, including 
                        intangible property transferred with 
                        other property or services, on an 
                        aggregate basis, or
                            ``(ii) the valuation of such a 
                        transfer on the basis of the realistic 
                        alternatives to such a transfer,
                if the Secretary determines that such basis is 
                the most reliable means of valuation of such 
                transfers.''.
            (2) Allocation among taxpayers.--Section 482 is 
        amended by adding at the end the following: ``For 
        purposes of this section, the Secretary shall require 
        the valuation of transfers of intangible property 
        (including intangible property transferred with other 
        property or services) on an aggregate basis or the 
        valuation of such a transfer on the basis of the 
        realistic alternatives to such a transfer, if the 
        Secretary determines that such basis is the most 
        reliable means of valuation of such transfers.''.
    (c) Effective Date.--
            (1) In general.--The amendments made by this 
        section shall apply to transfers in taxable years 
        beginning after December 31, 2017.
            (2) No inference.--Nothing in the amendment made by 
        subsection (a) shall be construed to create any 
        inference with respect to the application of section 
        936(h)(3) of the Internal Revenue Code of 1986, or the 
        authority of the Secretary of the Treasury to provide 
        regulations for such application, with respect to 
        taxable years beginning before January 1, 2018.

SEC. 14222. CERTAIN RELATED PARTY AMOUNTS PAID OR ACCRUED IN HYBRID 
                    TRANSACTIONS OR WITH HYBRID ENTITIES.

    (a) In General.--Part IX of subchapter B of chapter 1 is 
amended by inserting after section 267 the following:

``SEC. 267A. CERTAIN RELATED PARTY AMOUNTS PAID OR ACCRUED IN HYBRID 
                    TRANSACTIONS OR WITH HYBRID ENTITIES.

    ``(a) In General.--No deduction shall be allowed under this 
chapter for any disqualified related party amount paid or 
accrued pursuant to a hybrid transaction or by, or to, a hybrid 
entity.
    ``(b) Disqualified Related Party Amount.--For purposes of 
this section--
            ``(1) Disqualified related party amount.--The term 
        `disqualified related party amount' means any interest 
        or royalty paid or accrued to a related party to the 
        extent that--
                    ``(A) such amount is not included in the 
                income of such related party under the tax law 
                of the country of which such related party is a 
                resident for tax purposes or is subject to tax, 
                or
                    ``(B) such related party is allowed a 
                deduction with respect to such amount under the 
                tax law of such country.
        Such term shall not include any payment to the extent 
        such payment is included in the gross income of a 
        United States shareholder under section 951(a).
            ``(2) Related party.--The term `related party' 
        means a related person as defined in section 954(d)(3), 
        except that such section shall be applied with respect 
        to the person making the payment described in paragraph 
        (1) in lieu of the controlled foreign corporation 
        otherwise referred to in such section.
    ``(c) Hybrid Transaction.--For purposes of this section, 
the term `hybrid transaction' means any transaction, series of 
transactions, agreement, or instrument one or more payments 
with respect to which are treated as interest or royalties for 
purposes of this chapter and which are not so treated for 
purposes the tax law of the foreign country of which the 
recipient of such payment is resident for tax purposes or is 
subject to tax.
    ``(d) Hybrid Entity.--For purposes of this section, the 
term `hybrid entity' means any entity which is either--
            ``(1) treated as fiscally transparent for purposes 
        of this chapter but not so treated for purposes of the 
        tax law of the foreign country of which the entity is 
        resident for tax purposes or is subject to tax, or
            ``(2) treated as fiscally transparent for purposes 
        of such tax law but not so treated for purposes of this 
        chapter.
    ``(e) Regulations.--The Secretary shall issue such 
regulations or other guidance as may be necessary or 
appropriate to carry out the purposes of this section, 
including regulations or other guidance providing for--
            ``(1) rules for treating certain conduit 
        arrangements which involve a hybrid transaction or a 
        hybrid entity as subject to subsection (a),
            ``(2) rules for the application of this section to 
        branches or domestic entities,
            ``(3) rules for treating certain structured 
        transactions as subject to subsection (a),
            ``(4) rules for treating a tax preference as an 
        exclusion from income for purposes of applying 
        subsection (b)(1) if such tax preference has the effect 
        of reducing the generally applicable statutory rate by 
        25 percent or more,
            ``(5) rules for treating the entire amount of 
        interest or royalty paid or accrued to a related party 
        as a disqualified related party amount if such amount 
        is subject to a participation exemption system or other 
        system which provides for the exclusion or deduction of 
        a substantial portion of such amount,
            ``(6) rules for determining the tax residence of a 
        foreign entity if the entity is otherwise considered a 
        resident of more than one country or of no country,
            ``(7) exceptions from subsection (a) with respect 
        to--
                    ``(A) cases in which the disqualified 
                related party amount is taxed under the laws of 
                a foreign country other than the country of 
                which the related party is a resident for tax 
                purposes, and
                    ``(B) other cases which the Secretary 
                determines do not present a risk of eroding the 
                Federal tax base,
            ``(8) requirements for record keeping and 
        information reporting in addition to any requirements 
        imposed by section 6038A.''.
    (b) Conforming Amendment.--The table of sections for part 
IX of subchapter B of chapter 1 is amended by inserting after 
the item relating to section 267 the following new item:

``Sec. 267A. Certain related party amounts paid or accrued in hybrid 
          transactions or with hybrid entities.''.

    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 14223. SHAREHOLDERS OF SURROGATE FOREIGN CORPORATIONS NOT ELIGIBLE 
                    FOR REDUCED RATE ON DIVIDENDS.

    (a) In General.--Section 1(h)(11)(C)(iii) is amended--
            (1) by striking ``shall not include any foreign 
        corporation'' and inserting ``shall not include--
                                    ``(I) any foreign 
                                corporation'',
            (2) by striking the period at the end and inserting 
        ``, and'', and
            (3) by adding at the end the following new 
        subclause:
                                    ``(II) any corporation 
                                which first becomes a surrogate 
                                foreign corporation (as defined 
                                in section 7874(a)(2)(B)) after 
                                the date of the enactment of 
                                this subclause, other than a 
                                foreign corporation which is 
                                treated as a domestic 
                                corporation under section 
                                7874(b).''.
    (b) Effective Date.--The amendments made by this section 
shall apply to dividends received after the date of the 
enactment of this Act.

     Subpart C--Modifications Related to Foreign Tax Credit System

SEC. 14301. REPEAL OF SECTION 902 INDIRECT FOREIGN TAX CREDITS; 
                    DETERMINATION OF SECTION 960 CREDIT ON CURRENT YEAR 
                    BASIS.

    (a) Repeal of Section 902 Indirect Foreign Tax Credits.--
Subpart A of part III of subchapter N of chapter 1 is amended 
by striking section 902.
    (b) Determination of Section 960 Credit on Current Year 
Basis.--Section 960, as amended by section 14201, is amended--
            (1) by striking subsection (c), by redesignating 
        subsection (b) as subsection (c), by striking all that 
        precedes subsection (c) (as so redesignated) and 
        inserting the following:

``SEC. 960. DEEMED PAID CREDIT FOR SUBPART F INCLUSIONS.

    ``(a) In General.--For purposes of subpart A of this part, 
if there is included in the gross income of a domestic 
corporation any item of income under section 951(a)(1) with 
respect to any controlled foreign corporation with respect to 
which such domestic corporation is a United States shareholder, 
such domestic corporation shall be deemed to have paid so much 
of such foreign corporation's foreign income taxes as are 
properly attributable to such item of income.
    ``(b) Special Rules for Distributions From Previously Taxed 
Earnings and Profits.--For purposes of subpart A of this part--
            ``(1) In general.--If any portion of a distribution 
        from a controlled foreign corporation to a domestic 
        corporation which is a United States shareholder with 
        respect to such controlled foreign corporation is 
        excluded from gross income under section 959(a), such 
        domestic corporation shall be deemed to have paid so 
        much of such foreign corporation's foreign income taxes 
        as--
                    ``(A) are properly attributable to such 
                portion, and
                    ``(B) have not been deemed to have to been 
                paid by such domestic corporation under this 
                section for the taxable year or any prior 
                taxable year.
            ``(2) Tiered controlled foreign corporations.--If 
        section 959(b) applies to any portion of a distribution 
        from a controlled foreign corporation to another 
        controlled foreign corporation, such controlled foreign 
        corporation shall be deemed to have paid so much of 
        such other controlled foreign corporation's foreign 
        income taxes as--
                    ``(A) are properly attributable to such 
                portion, and
                    ``(B) have not been deemed to have been 
                paid by a domestic corporation under this 
                section for the taxable year or any prior 
                taxable year.'',
            (2) and by adding after subsection (d) (as added by 
        section 14201) the following new subsections:
    ``(e) Foreign Income Taxes.--The term `foreign income 
taxes' means any income, war profits, or excess profits taxes 
paid or accrued to any foreign country or possession of the 
United States.
    ``(f) Regulations.--The Secretary shall prescribe such 
regulations or other guidance as may be necessary or 
appropriate to carry out the provisions of this section.''.
    (c) Conforming Amendments.--
            (1) Section 78 is amended to read as follows:

``SEC. 78. GROSS UP FOR DEEMED PAID FOREIGN TAX CREDIT.

    ``If a domestic corporation chooses to have the benefits of 
subpart A of part III of subchapter N (relating to foreign tax 
credit) for any taxable year, an amount equal to the taxes 
deemed to be paid by such corporation under subsections (a), 
(b), and (d) of section 960 (determined without regard to the 
phrase `80 percent of' in subsection (d)(1) thereof) for such 
taxable year shall be treated for purposes of this title (other 
than sections 245 and 245A) as a dividend received by such 
domestic corporation from the foreign corporation.''.
            (2) Paragraph (4) of section 245(a) is amended to 
        read as follows:
            ``(4) Post-1986 undistributed earnings.--The term 
        `post-1986 undistributed earnings' means the amount of 
        the earnings and profits of the foreign corporation 
        (computed in accordance with sections 964(a) and 986) 
        accumulated in taxable years beginning after December 
        31, 1986--
                    ``(A) as of the close of the taxable year 
                of the foreign corporation in which the 
                dividend is distributed, and
                    ``(B) without diminution by reason of 
                dividends distributed during such taxable 
                year.''.
            (3) Section 245(a)(10)(C) is amended by striking 
        ``902, 907, and 960'' and inserting ``907 and 960''.
            (4) Sections 535(b)(1) and 545(b)(1) are each 
        amended by striking ``section 902(a) or 960(a)(1)'' and 
        inserting ``section 960''.
            (5) Section 814(f)(1) is amended--
                    (A) by striking subparagraph (B), and
                    (B) by striking all that precedes ``No 
                income'' and inserting the following:
            ``(1) Treatment of foreign taxes.--''.
            (6) Section 865(h)(1)(B) is amended by striking 
        ``902, 907,'' and inserting ``907''.
            (7) Section 901(a) is amended by striking 
        ``sections 902 and 960'' and inserting ``section 960''.
            (8) Section 901(e)(2) is amended by striking ``but 
        is not limited to--'' and all that follows through 
        ``that portion'' and inserting ``but is not limited to 
        that portion''.
            (9) Section 901(f) is amended by striking 
        ``sections 902 and 960'' and inserting ``section 960''.
            (10) Section 901(j)(1)(A) is amended by striking 
        ``902 or''.
            (11) Section 901(j)(1)(B) is amended by striking 
        ``sections 902 and 960'' and inserting ``section 960''.
            (12) Section 901(k)(2) is amended by striking ``, 
        902,''.
            (13) Section 901(k)(6) is amended by striking ``902 
        or''.
            (14) Section 901(m)(1)(B) is amended to read as 
        follows:
                    ``(B) in the case of a foreign income tax 
                paid by a foreign corporation, shall not be 
                taken into account for purposes of section 
                960.''.
            (15) Section 904(d)(2)(E) is amended--
                    (A) by amending clause (i) to read as 
                follows:
                            ``(i) Noncontrolled 10-percent 
                        owned foreign corporation.--The term 
                        `noncontrolled 10-percent owned foreign 
                        corporation' means any foreign 
                        corporation which is--
                                    ``(I) a specified 10-
                                percent owned foreign 
                                corporation (as defined in 
                                section 245A(b)), or
                                    ``(II) a passive foreign 
                                investment company (as defined 
                                in section 1297(a)) with 
                                respect to which the taxpayer 
                                meets the stock ownership 
                                requirements of section 902(a) 
                                (or, for purposes of applying 
                                paragraphs (3) and (4), the 
                                requirements of section 
                                902(b)).
                        A controlled foreign corporation shall 
                        not be treated as a noncontrolled 10-
                        percent owned foreign corporation with 
                        respect to any distribution out of its 
                        earnings and profits for periods during 
                        which it was a controlled foreign 
                        corporation. Any reference to section 
                        902 in this clause shall be treated as 
                        a reference to such section as in 
                        effect before its repeal.'', and
                    (B) by striking ``non-controlled section 
                902 corporation'' in clause (ii) and inserting 
                ``noncontrolled 10-percent owned foreign 
                corporation''.
            (16) Section 904(d)(4) is amended--
                    (A) by striking ``noncontrolled section 902 
                corporation'' each place it appears and 
                inserting ``noncontrolled 10-percent owned 
                foreign corporation'',
                    (B) by striking ``noncontrolled section 902 
                corporations'' in the heading thereof and 
                inserting ``noncontrolled 10-percent owned 
                foreign corporations''.
            (17) Section 904(d)(6)(A) is amended by striking 
        ``902, 907,'' and inserting ``907''.
            (18) Section 904(h)(10)(A) is amended by striking 
        ``sections 902, 907, and 960'' and inserting ``sections 
        907 and 960''.
            (19) Section 904(k) is amended to read as follows:
    ``(k) Cross References.--For increase of limitation under 
subsection (a) for taxes paid with respect to amounts received 
which were included in the gross income of the taxpayer for a 
prior taxable year as a United States shareholder with respect 
to a controlled foreign corporation, see section 960(c).''.
            (20) Section 905(c)(1) is amended by striking the 
        last sentence.
            (21) Section 905(c)(2)(B)(i) is amended to read as 
        follows:
                            ``(i) shall be taken into account 
                        for the taxable year to which such 
                        taxes relate, and''.
            (22) Section 906(a) is amended by striking ``(or 
        deemed, under section 902, paid or accrued during the 
        taxable year)''.
            (23) Section 906(b) is amended by striking 
        paragraphs (4) and (5).
            (24) Section 907(b)(2)(B) is amended by striking 
        ``902 or''.
            (25) Section 907(c)(3)(A) is amended--
                    (A) by striking subparagraph (A) and 
                inserting the following:
                    ``(A) interest, to the extent the category 
                of income of such interest is determined under 
                section 904(d)(3),'', and
                    (B) by striking ``section 960(a)'' in 
                subparagraph (B) and inserting ``section 960''.
            (26) Section 907(c)(5) is amended by striking ``902 
        or''.
            (27) Section 907(f)(2)(B)(i) is amended by striking 
        ``902 or''.
            (28) Section 908(a) is amended by striking ``902 
        or''.
            (29) Section 909(b) is amended--
                    (A) by striking ``section 902 corporation'' 
                in the matter preceding paragraph (1) and 
                inserting ``specified 10-percent owned foreign 
                corporation (as defined in section 245A(b) 
                without regard to paragraph (2) thereof)'',
                    (B) by striking ``902 or'' in paragraph 
                (1),
                    (C) by striking ``by such section 902 
                corporation'' and all that follows in the 
                matter following paragraph (2) and inserting 
                ``by such specified 10-percent owned foreign 
                corporation or a domestic corporation which is 
                a United States shareholder with respect to 
                such specified 10-percent owned foreign 
                corporation.'', and
                    (D) by striking ``Section 902 
                Corporations'' in the heading thereof and 
                inserting ``Specified 10-percent Owned Foreign 
                Corporations''.
            (30) Section 909(d) is amended by striking 
        paragraph (5).
            (31) Section 958(a)(1) is amended by striking 
        ``960(a)(1)'' and inserting ``960''.
            (32) Section 959(d) is amended by striking ``Except 
        as provided in section 960(a)(3), any'' and inserting 
        ``Any''.
            (33) Section 959(e) is amended by striking 
        ``section 960(b)'' and inserting ``section 960(c)''.
            (34) Section 1291(g)(2)(A) is amended by striking 
        ``any distribution--'' and all that follows through 
        ``but only if'' and inserting ``any distribution, any 
        withholding tax imposed with respect to such 
        distribution, but only if''.
            (35) Section 1293(f) is amended by striking ``and'' 
        at the end of paragraph (1), by striking the period at 
        the end of paragraph (2) and inserting ``, and'', and 
        by adding at the end the following new paragraph:
            ``(3) a domestic corporation which owns (or is 
        treated under section 1298(a) as owning) stock of a 
        qualified electing fund shall be treated in the same 
        manner as a United States shareholder of a controlled 
        foreign corporation (and such qualified electing fund 
        shall be treated in the same manner as such controlled 
        foreign corporation) if such domestic corporation meets 
        the stock ownership requirements of subsection (a) or 
        (b) of section 902 (as in effect before its repeal) 
        with respect to such qualified electing fund.''.
            (36) Section 6038(c)(1)(B) is amended by striking 
        ``sections 902 (relating to foreign tax credit for 
        corporate stockholder in foreign corporation) and 960 
        (relating to special rules for foreign tax credit)'' 
        and inserting ``section 960''.
            (37) Section 6038(c)(4) is amended by striking 
        subparagraph (C).
            (38) The table of sections for subpart A of part 
        III of subchapter N of chapter 1 is amended by striking 
        the item relating to section 902.
            (39) The table of sections for subpart F of part 
        III of subchapter N of chapter 1 is amended by striking 
        the item relating to section 960 and inserting the 
        following:

``Sec. 960. Deemed paid credit for subpart F inclusions.''.

    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years of foreign corporations beginning 
after December 31, 2017, and to taxable years of United States 
shareholders in which or with which such taxable years of 
foreign corporations end.

SEC. 14302. SEPARATE FOREIGN TAX CREDIT LIMITATION BASKET FOR FOREIGN 
                    BRANCH INCOME.

    (a) In General.--Section 904(d)(1), as amended by section 
14201, is amended by redesignating subparagraphs (B) and (C) as 
subparagraphs (C) and (D), respectively, and by inserting after 
subparagraph (A) the following new subparagraph:
                    ``(B) foreign branch income,''.
    (b) Foreign Branch Income.--
            (1) In general.--Section 904(d)(2) is amended by 
        inserting after subparagraph (I) the following new 
        subparagraph:
                    ``(J) Foreign branch income.--
                            ``(i) In general.--The term 
                        `foreign branch income' means the 
                        business profits of such United States 
                        person which are attributable to 1 or 
                        more qualified business units (as 
                        defined in section 989(a)) in 1 or more 
                        foreign countries. For purposes of the 
                        preceding sentence, the amount of 
                        business profits attributable to a 
                        qualified business unit shall be 
                        determined under rules established by 
                        the Secretary.
                            ``(ii) Exception.--Such term shall 
                        not include any income which is passive 
                        category income.''.
            (2) Conforming amendment.--Section 
        904(d)(2)(A)(ii), as amended by section 14201, is 
        amended by striking ``income described in paragraph 
        (1)(A) and'' and inserting ``income described in 
        paragraph (1)(A), foreign branch income, and''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 14303. SOURCE OF INCOME FROM SALES OF INVENTORY DETERMINED SOLELY 
                    ON BASIS OF PRODUCTION ACTIVITIES.

    (a) In General.--Section 863(b) is amended by adding at the 
end the following: ``Gains, profits, and income from the sale 
or exchange of inventory property described in paragraph (2) 
shall be allocated and apportioned between sources within and 
without the United States solely on the basis of the production 
activities with respect to the property.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 14304. ELECTION TO INCREASE PERCENTAGE OF DOMESTIC TAXABLE INCOME 
                    OFFSET BY OVERALL DOMESTIC LOSS TREATED AS FOREIGN 
                    SOURCE.

    (a) In General.--Section 904(g) is amended by adding at the 
end the following new paragraph:
            ``(5) Election to increase percentage of taxable 
        income treated as foreign source.--
                    ``(A) In general.--If any pre-2018 unused 
                overall domestic loss is taken into account 
                under paragraph (1) for any applicable taxable 
                year, the taxpayer may elect to have such 
                paragraph applied to such loss by substituting 
                a percentage greater than 50 percent (but not 
                greater than 100 percent) for 50 percent in 
                subparagraph (B) thereof.
                    ``(B) Pre-2018 unused overall domestic 
                loss.--For purposes of this paragraph, the term 
                `pre-2018 unused overall domestic loss' means 
                any overall domestic loss which--
                            ``(i) arises in a qualified taxable 
                        year beginning before January 1, 2018, 
                        and
                            ``(ii) has not been used under 
                        paragraph (1) for any taxable year 
                        beginning before such date.
                    ``(C) Applicable taxable year.--For 
                purposes of this paragraph, the term 
                `applicable taxable year' means any taxable 
                year of the taxpayer beginning after December 
                31, 2017, and before January 1, 2028.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2017.

                     PART II--INBOUND TRANSACTIONS

SEC. 14401. BASE EROSION AND ANTI-ABUSE TAX.

    (a) Imposition of Tax.--Subchapter A of chapter 1 is 
amended by adding at the end the following new part:

              ``PART VII--BASE EROSION AND ANTI-ABUSE TAX

``Sec. 59A. Tax on base erosion payments of taxpayers with substantial 
          gross receipts.

``SEC. 59A. TAX ON BASE EROSION PAYMENTS OF TAXPAYERS WITH SUBSTANTIAL 
                    GROSS RECEIPTS.

    ``(a) Imposition of Tax.--There is hereby imposed on each 
applicable taxpayer for any taxable year a tax equal to the 
base erosion minimum tax amount for the taxable year. Such tax 
shall be in addition to any other tax imposed by this subtitle.
    ``(b) Base Erosion Minimum Tax Amount.--For purposes of 
this section--
            ``(1) In general.--Except as provided in paragraphs 
        (2) and (3), the term `base erosion minimum tax amount' 
        means, with respect to any applicable taxpayer for any 
        taxable year, the excess (if any) of--
                    ``(A) an amount equal to 10 percent (5 
                percent in the case of taxable years beginning 
                in calendar year 2018) of the modified taxable 
                income of such taxpayer for the taxable year, 
                over
                    ``(B) an amount equal to the regular tax 
                liability (as defined in section 26(b)) of the 
                taxpayer for the taxable year, reduced (but not 
                below zero) by the excess (if any) of--
                            ``(i) the credits allowed under 
                        this chapter against such regular tax 
                        liability, over
                            ``(ii) the sum of--
                                    ``(I) the credit allowed 
                                under section 38 for the 
                                taxable year which is properly 
                                allocable to the research 
                                credit determined under section 
                                41(a), plus
                                    ``(II) the portion of the 
                                applicable section 38 credits 
                                not in excess of 80 percent of 
                                the lesser of the amount of 
                                such credits or the base 
                                erosion minimum tax amount 
                                (determined without regard to 
                                this subclause).
            ``(2) Modifications for taxable years beginning 
        after 2025.--In the case of any taxable year beginning 
        after December 31, 2025, paragraph (1) shall be 
        applied--
                    ``(A) by substituting `12.5 percent' for 
                `10 percent' in subparagraph (A) thereof, and
                    ``(B) by reducing (but not below zero) the 
                regular tax liability (as defined in section 
                26(b)) for purposes of subparagraph (B) thereof 
                by the aggregate amount of the credits allowed 
                under this chapter against such regular tax 
                liability rather than the excess described in 
                such subparagraph.
            ``(3) Increased rate for certain banks and 
        securities dealers.--
                    ``(A) In general.--In the case of a 
                taxpayer described in subparagraph (B) who is 
                an applicable taxpayer for any taxable year, 
                the percentage otherwise in effect under 
                paragraphs (1)(A) and (2)(A) shall each be 
                increased by one percentage point.
                    ``(B) Taxpayer described.--A taxpayer is 
                described in this subparagraph if such taxpayer 
                is a member of an affiliated group (as defined 
                in section 1504(a)(1)) which includes--
                            ``(i) a bank (as defined in section 
                        581), or
                            ``(ii) a registered securities 
                        dealer under section 15(a) of the 
                        Securities Exchange Act of 1934.
            ``(4) Applicable section 38 credits.--For purposes 
        of paragraph (1)(B)(ii)(II), the term `applicable 
        section 38 credits' means the credit allowed under 
        section 38 for the taxable year which is properly 
        allocable to--
                    ``(A) the low-income housing credit 
                determined under section 42(a),
                    ``(B) the renewable electricity production 
                credit determined under section 45(a), and
                    ``(C) the investment credit determined 
                under section 46, but only to the extent 
                properly allocable to the energy credit 
                determined under section 48.
    ``(c) Modified Taxable Income.--For purposes of this 
section--
            ``(1) In general.--The term `modified taxable 
        income' means the taxable income of the taxpayer 
        computed under this chapter for the taxable year, 
        determined without regard to--
                    ``(A) any base erosion tax benefit with 
                respect to any base erosion payment, or
                    ``(B) the base erosion percentage of any 
                net operating loss deduction allowed under 
                section 172 for the taxable year.
            ``(2) Base erosion tax benefit.--
                    ``(A) In general.--The term `base erosion 
                tax benefit' means--
                            ``(i) any deduction described in 
                        subsection (d)(1) which is allowed 
                        under this chapter for the taxable year 
                        with respect to any base erosion 
                        payment,
                            ``(ii) in the case of a base 
                        erosion payment described in subsection 
                        (d)(2), any deduction allowed under 
                        this chapter for the taxable year for 
                        depreciation (or amortization in lieu 
                        of depreciation) with respect to the 
                        property acquired with such payment,
                            ``(iii) in the case of a base 
                        erosion payment described in subsection 
                        (d)(3)--
                                    ``(I) any reduction under 
                                section 803(a)(1)(B) in the 
                                gross amount of premiums and 
                                other consideration on 
                                insurance and annuity contracts 
                                for premiums and other 
                                consideration arising out of 
                                indemnity insurance, and
                                    ``(II) any deduction under 
                                section 832(b)(4)(A) from the 
                                amount of gross premiums 
                                written on insurance contracts 
                                during the taxable year for 
                                premiums paid for reinsurance, 
                                and
                            ``(iv) in the case of a base 
                        erosion payment described in subsection 
                        (d)(4), any reduction in gross receipts 
                        with respect to such payment in 
                        computing gross income of the taxpayer 
                        for the taxable year for purposes of 
                        this chapter.
                    ``(B) Tax benefits disregarded if tax 
                withheld on base erosion payment.--
                            ``(i) In general.--Except as 
                        provided in clause (ii), any base 
                        erosion tax benefit attributable to any 
                        base erosion payment--
                                    ``(I) on which tax is 
                                imposed by section 871 or 881, 
                                and
                                    ``(II) with respect to 
                                which tax has been deducted and 
                                withheld under section 1441 or 
                                1442,
                        shall not be taken into account in 
                        computing modified taxable income under 
                        paragraph (1)(A) or the base erosion 
                        percentage under paragraph (4).
                            ``(ii) Exception.--The amount not 
                        taken into account in computing 
                        modified taxable income by reason of 
                        clause (i) shall be reduced under rules 
                        similar to the rules under section 
                        163(j)(5)(B) (as in effect before the 
                        date of the enactment of the Tax Cuts 
                        and Jobs Act).
            ``(3) Special rules for determining interest for 
        which deduction allowed.--For purposes of applying 
        paragraph (1), in the case of a taxpayer to which 
        section 163(j) applies for the taxable year, the 
        reduction in the amount of interest for which a 
        deduction is allowed by reason of such subsection shall 
        be treated as allocable first to interest paid or 
        accrued to persons who are not related parties with 
        respect to the taxpayer and then to such related 
        parties.
            ``(4) Base erosion percentage.--For purposes of 
        paragraph (1)(B)--
                    ``(A) In general.--The term `base erosion 
                percentage' means, for any taxable year, the 
                percentage determined by dividing--
                            ``(i) the aggregate amount of base 
                        erosion tax benefits of the taxpayer 
                        for the taxable year, by
                            ``(ii) the sum of--
                                    ``(I) the aggregate amount 
                                of the deductions (including 
                                deductions described in clauses 
                                (i) and (ii) of paragraph 
                                (2)(A)) allowable to the 
                                taxpayer under this chapter for 
                                the taxable year, plus
                                    ``(II) the base erosion tax 
                                benefits described in clauses 
                                (iii) and (iv) of paragraph 
                                (2)(A) allowable to the 
                                taxpayer for the taxable year.
                    ``(B) Certain items not taken into 
                account.--The amount under subparagraph (A)(ii) 
                shall be determined by not taking into 
                account--
                            ``(i) any deduction allowed under 
                        section 172, 245A, or 250 for the 
                        taxable year,
                            ``(ii) any deduction for amounts 
                        paid or accrued for services to which 
                        the exception under subsection (d)(5) 
                        applies, and
                            ``(iii) any deduction for qualified 
                        derivative payments which are not 
                        treated as a base erosion payment by 
                        reason of subsection (h).
    ``(d) Base Erosion Payment.--For purposes of this section--
            ``(1) In general.--The term `base erosion payment' 
        means any amount paid or accrued by the taxpayer to a 
        foreign person which is a related party of the taxpayer 
        and with respect to which a deduction is allowable 
        under this chapter.
            ``(2) Purchase of depreciable property.--Such term 
        shall also include any amount paid or accrued by the 
        taxpayer to a foreign person which is a related party 
        of the taxpayer in connection with the acquisition by 
        the taxpayer from such person of property of a 
        character subject to the allowance for depreciation (or 
        amortization in lieu of depreciation).
            ``(3) Reinsurance payments.--Such term shall also 
        include any premium or other consideration paid or 
        accrued by the taxpayer to a foreign person which is a 
        related party of the taxpayer for any reinsurance 
        payments which are taken into account under sections 
        803(a)(1)(B) or 832(b)(4)(A).
            ``(4) Certain payments to expatriated entities.--
                    ``(A) In general.--Such term shall also 
                include any amount paid or accrued by the 
                taxpayer with respect to a person described in 
                subparagraph (B) which results in a reduction 
                of the gross receipts of the taxpayer.
                    ``(B) Person described.--A person is 
                described in this subparagraph if such person 
                is a--
                            ``(i) surrogate foreign corporation 
                        which is a related party of the 
                        taxpayer, but only if such person first 
                        became a surrogate foreign corporation 
                        after November 9, 2017, or
                            ``(ii) foreign person which is a 
                        member of the same expanded affiliated 
                        group as the surrogate foreign 
                        corporation.
                    ``(C) Definitions.--For purposes of this 
                paragraph--
                            ``(i) Surrogate foreign 
                        corporation.--The term `surrogate 
                        foreign corporation' has the meaning 
                        given such term by section 
                        7874(a)(2)(B) but does not include a 
                        foreign corporation treated as a 
                        domestic corporation under section 
                        7874(b).
                            ``(ii) Expanded affiliated group.--
                        The term `expanded affiliated group' 
                        has the meaning given such term by 
                        section 7874(c)(1).
            ``(5) Exception for certain amounts with respect to 
        services.--Paragraph (1) shall not apply to any amount 
        paid or accrued by a taxpayer for services if--
                    ``(A) such services are services which meet 
                the requirements for eligibility for use of the 
                services cost method under section 482 
                (determined without regard to the requirement 
                that the services not contribute significantly 
                to fundamental risks of business success or 
                failure), and
                    ``(B) such amount constitutes the total 
                services cost with no markup component.
    ``(e) Applicable Taxpayer.--For purposes of this section--
            ``(1) In general.--The term `applicable taxpayer' 
        means, with respect to any taxable year, a taxpayer--
                    ``(A) which is a corporation other than a 
                regulated investment company, a real estate 
                investment trust, or an S corporation,
                    ``(B) the average annual gross receipts of 
                which for the 3-taxable-year period ending with 
                the preceding taxable year are at least 
                $500,000,000, and
                    ``(C) the base erosion percentage (as 
                determined under subsection (c)(4)) of which 
                for the taxable year is 3 percent (2 percent in 
                the case of a taxpayer described in subsection 
                (b)(3)(B)) or higher.
            ``(2) Gross receipts.--
                    ``(A) Special rule for foreign persons.--In 
                the case of a foreign person the gross receipts 
                of which are taken into account for purposes of 
                paragraph (1)(B), only gross receipts which are 
                taken into account in determining income which 
                is effectively connected with the conduct of a 
                trade or business within the United States 
                shall be taken into account. In the case of a 
                taxpayer which is a foreign person, the 
                preceding sentence shall not apply to the gross 
                receipts of any United States person which are 
                aggregated with the taxpayer's gross receipts 
                by reason of paragraph (3).
                    ``(B) Other rules made applicable.--Rules 
                similar to the rules of subparagraphs (B), (C), 
                and (D) of section 448(c)(3) shall apply in 
                determining gross receipts for purposes of this 
                section.
            ``(3) Aggregation rules.--All persons treated as a 
        single employer under subsection (a) of section 52 
        shall be treated as 1 person for purposes of this 
        subsection and subsection (c)(4), except that in 
        applying section 1563 for purposes of section 52, the 
        exception for foreign corporations under section 
        1563(b)(2)(C) shall be disregarded.
    ``(f) Foreign Person.--For purposes of this section, the 
term `foreign person' has the meaning given such term by 
section 6038A(c)(3).
    ``(g) Related Party.--For purposes of this section--
            ``(1) In general.--The term `related party' means, 
        with respect to any applicable taxpayer--
                    ``(A) any 25-percent owner of the taxpayer,
                    ``(B) any person who is related (within the 
                meaning of section 267(b) or 707(b)(1)) to the 
                taxpayer or any 25-percent owner of the 
                taxpayer, and
                    ``(C) any other person who is related 
                (within the meaning of section 482) to the 
                taxpayer.
            ``(2) 25-percent owner.--The term `25-percent 
        owner' means, with respect to any corporation, any 
        person who owns at least 25 percent of--
                    ``(A) the total voting power of all classes 
                of stock of a corporation entitled to vote, or
                    ``(B) the total value of all classes of 
                stock of such corporation.
            ``(3) Section 318 to apply.--Section 318 shall 
        apply for purposes of paragraphs (1) and (2), except 
        that--
                    ``(A) `10 percent' shall be substituted for 
                `50 percent' in section 318(a)(2)(C), and
                    ``(B) subparagraphs (A), (B), and (C) of 
                section 318(a)(3) shall not be applied so as to 
                consider a United States person as owning stock 
                which is owned by a person who is not a United 
                States person.
    ``(h) Exception for Certain Payments Made in the Ordinary 
Course of Trade or Business.--For purposes of this section--
            ``(1) In general.--Except as provided in paragraph 
        (3), any qualified derivative payment shall not be 
        treated as a base erosion payment.
            ``(2) Qualified derivative payment.--
                    ``(A) In general.--The term `qualified 
                derivative payment' means any payment made by a 
                taxpayer pursuant to a derivative with respect 
                to which the taxpayer--
                            ``(i) recognizes gain or loss as if 
                        such derivative were sold for its fair 
                        market value on the last business day 
                        of the taxable year (and such 
                        additional times as required by this 
                        title or the taxpayer's method of 
                        accounting),
                            ``(ii) treats any gain or loss so 
                        recognized as ordinary, and
                            ``(iii) treats the character of all 
                        items of income, deduction, gain, or 
                        loss with respect to a payment pursuant 
                        to the derivative as ordinary.
                    ``(B) Reporting requirement.--No payments 
                shall be treated as qualified derivative 
                payments under subparagraph (A) for any taxable 
                year unless the taxpayer includes in the 
                information required to be reported under 
                section 6038B(b)(2) with respect to such 
                taxable year such information as is necessary 
                to identify the payments to be so treated and 
                such other information as the Secretary 
                determines necessary to carry out the 
                provisions of this subsection.
            ``(3) Exceptions for payments otherwise treated as 
        base erosion payments.--This subsection shall not apply 
        to any qualified derivative payment if--
                    ``(A) the payment would be treated as a 
                base erosion payment if it were not made 
                pursuant to a derivative, including any 
                interest, royalty, or service payment, or
                    ``(B) in the case of a contract which has 
                derivative and nonderivative components, the 
                payment is properly allocable to the 
                nonderivative component.
            ``(4) Derivative defined.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `derivative' 
                means any contract (including any option, 
                forward contract, futures contract, short 
                position, swap, or similar contract) the value 
                of which, or any payment or other transfer with 
                respect to which, is (directly or indirectly) 
                determined by reference to one or more of the 
                following:
                            ``(i) Any share of stock in a 
                        corporation.
                            ``(ii) Any evidence of 
                        indebtedness.
                            ``(iii) Any commodity which is 
                        actively traded.
                            ``(iv) Any currency.
                            ``(v) Any rate, price, amount, 
                        index, formula, or algorithm.
                Such term shall not include any item described 
                in clauses (i) through (v).
                    ``(B) Treatment of american depository 
                receipts and similar instruments.--Except as 
                otherwise provided by the Secretary, for 
                purposes of this part, American depository 
                receipts (and similar instruments) with respect 
                to shares of stock in foreign corporations 
                shall be treated as shares of stock in such 
                foreign corporations.
                    ``(C) Exception for certain contracts.--
                Such term shall not include any insurance, 
                annuity, or endowment contract issued by an 
                insurance company to which subchapter L applies 
                (or issued by any foreign corporation to which 
                such subchapter would apply if such foreign 
                corporation were a domestic corporation).
    ``(i) Regulations.--The Secretary shall prescribe such 
regulations or other guidance as may be necessary or 
appropriate to carry out the provisions of this section, 
including regulations--
            ``(1) providing for such adjustments to the 
        application of this section as are necessary to prevent 
        the avoidance of the purposes of this section, 
        including through--
                    ``(A) the use of unrelated persons, conduit 
                transactions, or other intermediaries, or
                    ``(B) transactions or arrangements 
                designed, in whole or in part--
                            ``(i) to characterize payments 
                        otherwise subject to this section as 
                        payments not subject to this section, 
                        or
                            ``(ii) to substitute payments not 
                        subject to this section for payments 
                        otherwise subject to this section and
            ``(2) for the application of subsection (g), 
        including rules to prevent the avoidance of the 
        exceptions under subsection (g)(3).''.
    (b) Reporting Requirements and Penalties.--
            (1) In general.--Subsection (b) of section 6038A is 
        amended to read as follows:
    ``(b) Required Information.--
            ``(1) In general.--For purposes of subsection (a), 
        the information described in this subsection is such 
        information as the Secretary prescribes by regulations 
        relating to--
                    ``(A) the name, principal place of 
                business, nature of business, and country or 
                countries in which organized or resident, of 
                each person which--
                            ``(i) is a related party to the 
                        reporting corporation, and
                            ``(ii) had any transaction with the 
                        reporting corporation during its 
                        taxable year,
                    ``(B) the manner in which the reporting 
                corporation is related to each person referred 
                to in subparagraph (A), and
                    ``(C) transactions between the reporting 
                corporation and each foreign person which is a 
                related party to the reporting corporation.
            ``(2) Additional information regarding base erosion 
        payments.--For purposes of subsection (a) and section 
        6038C, if the reporting corporation or the foreign 
        corporation to whom section 6038C applies is an 
        applicable taxpayer, the information described in this 
        subsection shall include--
                    ``(A) such information as the Secretary 
                determines necessary to determine the base 
                erosion minimum tax amount, base erosion 
                payments, and base erosion tax benefits of the 
                taxpayer for purposes of section 59A for the 
                taxable year, and
                    ``(B) such other information as the 
                Secretary determines necessary to carry out 
                such section.
        For purposes of this paragraph, any term used in this 
        paragraph which is also used in section 59A shall have 
        the same meaning as when used in such section.''.
            (2) Increase in penalty.--Paragraphs (1) and (2) of 
        section 6038A(d) are each amended by striking 
        ``$10,000'' and inserting ``$25,000''.
    (c) Disallowance of Credits Against Base Erosion Tax.--
Paragraph (2) of section 26(b) is amended by inserting after 
subparagraph (A) the following new subparagraph:
                    ``(B) section 59A (relating to base erosion 
                and anti-abuse tax),''.
    (d) Conforming Amendments.--
            (1) The table of parts for subchapter A of chapter 
        1 is amended by adding after the item relating to part 
        VI the following new item:

             ``Part VII. Base Erosion and Anti-abuse Tax''.

            (2) Paragraph (1) of section 882(a), as amended by 
        this Act, is amended by inserting `` or 59A,'' after 
        ``section 11,''.
            (3) Subparagraph (A) of section 6425(c)(1), as 
        amended by section 13001, is amended to read as 
        follows:
                    ``(A) the sum of--
                            ``(i) the tax imposed by section 
                        11, or subchapter L of chapter 1, 
                        whichever is applicable, plus
                            ``(ii) the tax imposed by section 
                        59A, over''.
            (4)(A) Subparagraph (A) of section 6655(g)(1), as 
        amended by sections 12001 and 13001, is amended by 
        striking ``plus'' at the end of clause (i), by 
        redesignating clause (ii) as clause (iii), and by 
        inserting after clause (i) the following new clause:
                            ``(ii) the tax imposed by section 
                        59A, plus''.
            (B) Subparagraphs (A)(i) and (B)(i) of section 
        6655(e)(2), as amended by sections 12001 and 13001, are 
        each amended by inserting ``and modified taxable 
        income'' after ``taxable income''.
            (C) Subparagraph (B) of section 6655(e)(2) is 
        amended by adding at the end the following new clause:
                            ``(iii) Modified taxable income.--
                        The term `modified taxable income' has 
                        the meaning given such term by section 
                        59A(c)(1).''.
    (e) Effective Date.--The amendments made by this section 
shall apply to base erosion payments (as defined in section 
59A(d) of the Internal Revenue Code of 1986, as added by this 
section) paid or accrued in taxable years beginning after 
December 31, 2017.

                       PART III--OTHER PROVISIONS

SEC. 14501. RESTRICTION ON INSURANCE BUSINESS EXCEPTION TO PASSIVE 
                    FOREIGN INVESTMENT COMPANY RULES.

    (a) In General.--Section 1297(b)(2)(B) is amended to read 
as follows:
                    ``(B) derived in the active conduct of an 
                insurance business by a qualifying insurance 
                corporation (as defined in subsection (f)),''.
    (b) Qualifying Insurance Corporation Defined.--Section 1297 
is amended by adding at the end the following new subsection:
    ``(f) Qualifying Insurance Corporation.--For purposes of 
subsection (b)(2)(B)--
            ``(1) In general.--The term `qualifying insurance 
        corporation' means, with respect to any taxable year, a 
        foreign corporation--
                    ``(A) which would be subject to tax under 
                subchapter L if such corporation were a 
                domestic corporation, and
                    ``(B) the applicable insurance liabilities 
                of which constitute more than 25 percent of its 
                total assets, determined on the basis of such 
                liabilities and assets as reported on the 
                corporation's applicable financial statement 
                for the last year ending with or within the 
                taxable year.
            ``(2) Alternative facts and circumstances test for 
        certain corporations.--If a corporation fails to 
        qualify as a qualified insurance corporation under 
        paragraph (1) solely because the percentage determined 
        under paragraph (1)(B) is 25 percent or less, a United 
        States person that owns stock in such corporation may 
        elect to treat such stock as stock of a qualifying 
        insurance corporation if--
                    ``(A) the percentage so determined for the 
                corporation is at least 10 percent, and
                    ``(B) under regulations provided by the 
                Secretary, based on the applicable facts and 
                circumstances--
                            ``(i) the corporation is 
                        predominantly engaged in an insurance 
                        business, and
                            ``(ii) such failure is due solely 
                        to runoff-related or rating-related 
                        circumstances involving such insurance 
                        business.
            ``(3) Applicable insurance liabilities.--For 
        purposes of this subsection--
                    ``(A) In general.--The term `applicable 
                insurance liabilities' means, with respect to 
                any life or property and casualty insurance 
                business--
                            ``(i) loss and loss adjustment 
                        expenses, and
                            ``(ii) reserves (other than 
                        deficiency, contingency, or unearned 
                        premium reserves) for life and health 
                        insurance risks and life and health 
                        insurance claims with respect to 
                        contracts providing coverage for 
                        mortality or morbidity risks.
                    ``(B) Limitations on amount of 
                liabilities.--Any amount determined under 
                clause (i) or (ii) of subparagraph (A) shall 
                not exceed the lesser of such amount--
                            ``(i) as reported to the applicable 
                        insurance regulatory body in the 
                        applicable financial statement 
                        described in paragraph (4)(A) (or, if 
                        less, the amount required by applicable 
                        law or regulation), or
                            ``(ii) as determined under 
                        regulations prescribed by the 
                        Secretary.
            ``(4) Other definitions and rules.--For purposes of 
        this subsection--
                    ``(A) Applicable financial statement.--The 
                term `applicable financial statement' means a 
                statement for financial reporting purposes 
                which--
                            ``(i) is made on the basis of 
                        generally accepted accounting 
                        principles,
                            ``(ii) is made on the basis of 
                        international financial reporting 
                        standards, but only if there is no 
                        statement that meets the requirement of 
                        clause (i), or
                            ``(iii) except as otherwise 
                        provided by the Secretary in 
                        regulations, is the annual statement 
                        which is required to be filed with the 
                        applicable insurance regulatory body, 
                        but only if there is no statement which 
                        meets the requirements of clause (i) or 
                        (ii).
                    ``(B) Applicable insurance regulatory 
                body.--The term `applicable insurance 
                regulatory body' means, with respect to any 
                insurance business, the entity established by 
                law to license, authorize, or regulate such 
                business and to which the statement described 
                in subparagraph (A) is provided.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2017.

SEC. 14502. REPEAL OF FAIR MARKET VALUE METHOD OF INTEREST EXPENSE 
                    APPORTIONMENT.

    (a) In General.--Paragraph (2) of section 864(e) is amended 
to read as follows:
            ``(2) Gross income and fair market value methods 
        may not be used for interest.--All allocations and 
        apportionments of interest expense shall be determined 
        using the adjusted bases of assets rather than on the 
        basis of the fair market value of the assets or gross 
        income.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to taxable years beginning after December 31, 2017.

                                TITLE II

SEC. 20001. OIL AND GAS PROGRAM.

    (a) Definitions.--In this section:
            (1) Coastal plain.--The term ``Coastal Plain'' 
        means the area identified as the 1002 Area on the 
        plates prepared by the United States Geological Survey 
        entitled ``ANWR Map - Plate 1'' and ``ANWR Map - Plate 
        2'', dated October 24, 2017, and on file with the 
        United States Geological Survey and the Office of the 
        Solicitor of the Department of the Interior.
            (2) Secretary.--The term ``Secretary'' means the 
        Secretary of the Interior, acting through the Bureau of 
        Land Management.
    (b) Oil and Gas Program.--
            (1) In general.--Section 1003 of the Alaska 
        National Interest Lands Conservation Act (16 U.S.C. 
        3143) shall not apply to the Coastal Plain.
            (2) Establishment.--
                    (A) In general.--The Secretary shall 
                establish and administer a competitive oil and 
                gas program for the leasing, development, 
                production, and transportation of oil and gas 
                in and from the Coastal Plain.
                    (B) Purposes.--Section 303(2)(B) of the 
                Alaska National Interest Lands Conservation Act 
                (Public Law 96-487; 94 Stat. 2390) is amended--
                            (i) in clause (iii), by striking 
                        ``and'' at the end;
                            (ii) in clause (iv), by striking 
                        the period at the end and inserting ``; 
                        and''; and
                            (iii) by adding at the end the 
                        following:
                            ``(v) to provide for an oil and gas 
                        program on the Coastal Plain.''.
            (3) Management.--Except as otherwise provided in 
        this section, the Secretary shall manage the oil and 
        gas program on the Coastal Plain in a manner similar to 
        the administration of lease sales under the Naval 
        Petroleum Reserves Production Act of 1976 (42 U.S.C. 
        6501 et seq.) (including regulations).
            (4) Royalties.--Notwithstanding the Mineral Leasing 
        Act (30 U.S.C. 181 et seq.), the royalty rate for 
        leases issued pursuant to this section shall be 16.67 
        percent.
            (5) Receipts.--Notwithstanding the Mineral Leasing 
        Act (30 U.S.C. 181 et seq.), of the amount of adjusted 
        bonus, rental, and royalty receipts derived from the 
        oil and gas program and operations on Federal land 
        authorized under this section--
                    (A) 50 percent shall be paid to the State 
                of Alaska; and
                    (B) the balance shall be deposited into the 
                Treasury as miscellaneous receipts.
    (c) 2 Lease Sales Within 10 Years.--
            (1) Requirement.--
                    (A) In general.--Subject to subparagraph 
                (B), the Secretary shall conduct not fewer than 
                2 lease sales area-wide under the oil and gas 
                program under this section by not later than 10 
                years after the date of enactment of this Act.
                    (B) Sale acreages; schedule.--
                            (i) Acreages.--The Secretary shall 
                        offer for lease under the oil and gas 
                        program under this section--
                                    (I) not fewer than 400,000 
                                acres area-wide in each lease 
                                sale; and
                                    (II) those areas that have 
                                the highest potential for the 
                                discovery of hydrocarbons.
                            (ii) Schedule.--The Secretary shall 
                        offer--
                                    (I) the initial lease sale 
                                under the oil and gas program 
                                under this section not later 
                                than 4 years after the date of 
                                enactment of this Act; and
                                    (II) a second lease sale 
                                under the oil and gas program 
                                under this section not later 
                                than 7 years after the date of 
                                enactment of this Act.
            (2) Rights-of-way.--The Secretary shall issue any 
        rights-of-way or easements across the Coastal Plain for 
        the exploration, development, production, or 
        transportation necessary to carry out this section.
            (3) Surface development.--In administering this 
        section, the Secretary shall authorize up to 2,000 
        surface acres of Federal land on the Coastal Plain to 
        be covered by production and support facilities 
        (including airstrips and any area covered by gravel 
        berms or piers for support of pipelines) during the 
        term of the leases under the oil and gas program under 
        this section.

SEC. 20002. LIMITATIONS ON AMOUNT OF DISTRIBUTED QUALIFIED OUTER 
                    CONTINENTAL SHELF REVENUES.

    Section 105(f)(1) of the Gulf of Mexico Energy Security Act 
of 2006 (43 U.S.C. 1331 note; Public Law 109-432) is amended by 
striking ``exceed $500,000,000 for each of fiscal years 2016 
through 2055.'' and inserting the following: ``exceed--
                    ``(A) $500,000,000 for each of fiscal years 
                2016 through 2019;
                    ``(B) $650,000,000 for each of fiscal years 
                2020 and 2021; and
                    ``(C) $500,000,000 for each of fiscal years 
                2022 through 2055.''.

SEC. 20003. STRATEGIC PETROLEUM RESERVE DRAWDOWN AND SALE.

    (a) Drawdown and Sale.--
            (1) In general.--Notwithstanding section 161 of the 
        Energy Policy and Conservation Act (42 U.S.C. 6241), 
        except as provided in subsections (b) and (c), the 
        Secretary of Energy shall draw down and sell from the 
        Strategic Petroleum Reserve 7,000,000 barrels of crude 
        oil during the period of fiscal years 2026 through 
        2027.
            (2) Deposit of amounts received from sale.--Amounts 
        received from a sale under paragraph (1) shall be 
        deposited in the general fund of the Treasury during 
        the fiscal year in which the sale occurs.
    (b) Emergency Protection.--The Secretary of Energy shall 
not draw down and sell crude oil under subsection (a) in a 
quantity that would limit the authority to sell petroleum 
products under subsection (h) of section 161 of the Energy 
Policy and Conservation Act (42 U.S.C. 6241) in the full 
quantity authorized by that subsection.
    (c) Limitation.--The Secretary of Energy shall not drawdown 
or conduct sales of crude oil under subsection (a) after the 
date on which a total of $600,000,000 has been deposited in the 
general fund of the Treasury from sales authorized under that 
subsection.
      And the Senate agree to the same.
                From the Committee on Ways and Means, for 
                consideration of the House bill and the Senate 
                amendment, and modifications committed to 
                conference:

                                   Kevin Brady,
                                   Devin Nunes,
                                   Peter J. Roskam,
                                   Diane Black,
                                   Kristi L. Noem,
                From the Committee on Energy and Commerce, for 
                consideration of sec. 20003 of the Senate 
                amendment, and modifications committed to 
                conference:
                                   Fred Upton,
                                   John Shimkus,
                From the Committee on Natural Resources, for 
                consideration of secs. 20001 and 20002 of the 
                Senate amendment, and modifications committed 
                to conference:
                                   Rob Bishop,
                                   Don Young,
                                 Managers on the Part of the House.

                                   Orrin G. Hatch,
                                   Michael B. Enzi,
                                   Lisa Murkowski,
                                   John Cornyn,
                                   John Thune,
                                   Rob Portman,
                                   Tim Scott,
                                   Patrick J. Toomey,
                                Managers on the Part of the Senate.

       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

      The managers on the part of the House and the Senate at 
the conference on the disagreeing votes of the two Houses on 
the amendment of the Senate to the bill (H.R. 1), the Tax Cuts 
and Jobs Act, submit the following joint statement to the House 
and the Senate in explanation of the effect of the action 
agreed upon by the managers and recommended in the accompanying 
conference report:
      The Senate amendment struck all of the House bill after 
the enacting clause and inserted a substitute text.
      The House recedes from its disagreement to the amendment 
of the Senate with an amendment that is a substitute for the 
House bill and the Senate amendment. The differences between 
the House bill, the Senate amendment, and the substitute agreed 
to in conference are noted below, except for clerical 
corrections, conforming changes made necessary by agreements 
reached by the conferees, and minor drafting and clarifying 
changes.

                                TITLE I

                       INDIVIDUAL TAX PROVISIONS

 A. Reduction and Simplification of Individual Income Tax Rates (sec. 
1001 of the House bill, sec. 11001 of the Senate amendment, and sec. 1 
                              of the Code)

                              PRESENT LAW

In general
      To determine regular tax liability, an individual 
taxpayer generally must apply the tax rate schedules (or the 
tax tables) to his or her regular taxable income. The rate 
schedules are broken into several ranges of income, known as 
income brackets, and the marginal tax rate increases as a 
taxpayer's income increases.
Tax rate schedules
      Separate rate schedules apply based on an individual's 
filing status. For 2017, the regular individual income tax rate 
schedules are as follows:

        TABLE 1.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2017\1\
------------------------------------------------------------------------
           If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
Not over $9,325...........................  10% of the taxable income
Over $9,325 but not over $37,950..........  $932.50 plus 15% of the
                                             excess over $9,325
Over $37,950 but not over $91,900.........  $5,226.25 plus 25% of the
                                             excess over $37,950
Over $91,900 but not over $191,650........  $18,713.75 plus 28% of the
                                             excess over $91,900
Over $191,650 but not over $416,700.......  $46,643.75 plus 33% of the
                                             excess over $191,650
Over $416,700 but not over $418,400.......  $120,910.25 plus 35% of the
                                             excess over $416,700
Over $418,400.............................  $121,505.25 plus 39.6% of
                                             the excess over $418,400
------------------------------------------------------------------------
                           Heads of Households
Not over $13,350..........................  10% of the taxable income
Over $13,350 but not over $50,800.........  $1,335 plus 15% of the
                                             excess over $13,350
Over $50,800 but not over $131,200........  $6,952.50 plus 25% of the
                                             excess over $50,800
Over $131,200 but not over $212,500.......  $27,052.50 plus 28% of the
                                             excess over $131,200
Over $212,500 but not over $416,700.......  $49,816.50 plus 33% of the
                                             excess over $212,500
Over $416,700 but not over $444,550.......  $117,202.50 plus 35% of the
                                             excess over $416,700
Over $444,550.............................  $126,950 plus 39.6% of the
                                             excess over $444,550
------------------------------------------------------------------------
     Married Individuals Filing Joint Returns and Surviving Spouses
Not over $18,650..........................  10% of the taxable income
Over $18,650 but not over $75,900.........  $1,865 plus 15% of the
                                             excess over $18,650
Over $75,900 but not over $153,100........  $10,452.50 plus 25% of the
                                             excess over $75,900
Over $153,100 but not over $233,350.......  $29,752.50 plus 28% of the
                                             excess over $153,100
Over $233,350 but not over $416,700.......  $52,222.50 plus 33% of the
                                             excess over $233,350
Over $416,700 but not over $470,700.......  $112,728 plus 35% of the
                                             excess over $416,700
Over $470,700.............................  $131,628 plus 39.6% of the
                                             excess over $470,700
------------------------------------------------------------------------
               Married Individuals Filing Separate Returns
Not over $9,325...........................  10% of the taxable income
Over $9,325 but not over $37,950..........  $932.50 plus 15% of the
                                             excess over $9,325
Over $37,950 but not over $76,550.........  $5,226.25 plus 25% of the
                                             excess over $37,950
Over $76,550 but not over $116,675........  $14,876.25 plus 28% of the
                                             excess over $76,550
Over $116,675 but not over $208,350.......  $26,111.25 plus 33% of the
                                             excess over $116,675
Over $208,350 but not over $235,350.......  $56,364 plus 35% of the
                                             excess over $208,350
Over $235,350.............................  $65,814 plus 39.6% of the
                                             excess over $235,350
------------------------------------------------------------------------
                           Estates and Trusts
Not over $2,550...........................  15% of the taxable income
Over $2,550 but not over $6,000...........  $382.50 plus 25% of the
                                             excess over $2,550
Over $6,000 but not over $9,150...........  $1,245 plus 28% of the
                                             excess over $6,000
Over $9,150 but not over $12,500..........  $2,127 plus 33% of the
                                             excess over $9,150
Over $12,500..............................  $3,232.50 plus 39.6% of the
                                             excess over $12,500
------------------------------------------------------------------------
\1\ Rev. Proc. 2016-55, 2016-45 I.R.B. 707, sec. 3.01.

Unearned income of children
      Special rules (generally referred to as the ``kiddie 
tax'') apply to the net unearned income of certain children.\1\ 
Generally, the kiddie tax applies to a child if: (1) the child 
has not reached the age of 19 by the close of the taxable year, 
or the child is a full-time student under the age of 24, and 
either of the child's parents is alive at such time; (2) the 
child's unearned income exceeds $2,100 (for 2017); and (3) the 
child does not file a joint return.\2\ The kiddie tax applies 
regardless of whether the child may be claimed as a dependent 
by either or both parents. For children above age 17, the 
kiddie tax applies only to children whose earned income does 
not exceed one-half of the amount of their support.
---------------------------------------------------------------------------
    \1\Sec. 1(g). Unless otherwise stated, all section references are 
to the Internal Revenue Code of 1986, as amended (the ``Code'').
    \2\Sec. 1(g)(2).
---------------------------------------------------------------------------
      Under these rules, the net unearned income of a child 
(for 2017, unearned income over $2,100) is taxed at the 
parents' tax rates if the parents' tax rates are higher than 
the tax rates of the child.\3\ The remainder of a child's 
taxable income (i.e., earned income, plus unearned income up to 
$2,100 (for 2017), less the child's standard deduction) is 
taxed at the child's rates, regardless of whether the kiddie 
tax applies to the child. For these purposes, unearned income 
is income other than wages, salaries, professional fees, other 
amounts received as compensation for personal services actually 
rendered, and distributions from qualified disability 
trusts.\4\ In general, a child is eligible to use the 
preferential tax rates for qualified dividends and capital 
gains.\5\
---------------------------------------------------------------------------
    \3\Special rules apply for determining which parent's rate applies 
where a joint return is not filed.
    \4\Sec. 1(g)(4) and sec. 911(e)(2).
    \5\Sec. 1(h).
---------------------------------------------------------------------------
      The kiddie tax is calculated by computing the ``allocable 
parental tax.'' This involves adding the net unearned income of 
the child to the parent's income and then applying the parent's 
tax rate. A child's ``net unearned income'' is the child's 
unearned income less the sum of (1) the minimum standard 
deduction allowed to dependents ($1,050 for 2017\6\), and (2) 
the greater of (a) such minimum standard deduction amount or 
(b) the amount of allowable itemized deductions that are 
directly connected with the production of the unearned 
income.\7\
---------------------------------------------------------------------------
    \6\Sec. 3.02 of Rev. Proc. 2016-55, supra.
    \7\Sec. 1(g)(4).
---------------------------------------------------------------------------
      The allocable parental tax equals the hypothetical 
increase in tax to the parent that results from adding the 
child's net unearned income to the parent's taxable income.\8\ 
If the child has net capital gains or qualified dividends, 
these items are allocated to the parent's hypothetical taxable 
income according to the ratio of net unearned income to the 
child's total unearned income. If a parent has more than one 
child subject to the kiddie tax, the net unearned income of all 
children is combined, and a single kiddie tax is calculated. 
Each child is then allocated a proportionate share of the 
hypothetical increase, based upon the child's net unearned 
income relative to the aggregate net unearned income of all of 
the parent's children subject to the tax.
---------------------------------------------------------------------------
    \8\Sec. 1(g)(3).
---------------------------------------------------------------------------
      Generally, a child must file a separate return to report 
his or her income.\9\ In such case, items on the parents' 
return are not affected by the child's income, and the total 
tax due from the child is the greater of:
---------------------------------------------------------------------------
    \9\Sec. 1(g)(6). See Form 8615, Tax for Certain Children Who Have 
Unearned Income.
---------------------------------------------------------------------------
            1. The sum of (a) the tax payable by the child on 
        the child's earned income and unearned income up to 
        $2,100 (for 2017), plus (b) the allocable parental tax 
        on the child's unearned income, or
            2. The tax on the child's income without regard to 
        the kiddie tax provisions.\10\
---------------------------------------------------------------------------
    \10\Sec. 1(g)(1).
---------------------------------------------------------------------------
      Under certain circumstances, a parent may elect to report 
a child's unearned income on the parent's return.\11\
---------------------------------------------------------------------------
    \11\Sec. 1(g)(7).
---------------------------------------------------------------------------
Capital gains rates
In general
      In the case of an individual, estate, or trust, any 
adjusted net capital gain which otherwise would be taxed at the 
10- or 15-percent rate is not taxed. Any adjusted net capital 
gain which otherwise would be taxed at rates over 15-percent 
and below 39.6 percent is taxed at a 15-percent rate. Any 
adjusted net capital gain which otherwise would be taxed at a 
39.6-percent rate is taxed at a 20-percent rate.
      The unrecaptured section 1250 gain is taxed at a maximum 
rate of 25 percent, and 28-percent rate gain is taxed at a 
maximum rate of 28 percent. Any amount of unrecaptured section 
1250 gain or 28-percent rate gain otherwise taxed at a 10- or 
15-percent rate is taxed at the otherwise applicable rate.
      In addition, a tax is imposed on net investment income in 
the case of an individual, estate, or trust. In the case of an 
individual, the tax is 3.8 percent of the lesser of net 
investment income, which includes gains and dividends, or the 
excess of modified adjusted gross income over the threshold 
amount. The threshold amount is $250,000 in the case of a joint 
return or surviving spouse, $125,000 in the case of a married 
individual filing a separate return, and $200,000 in the case 
of any other individual.
Definitions
            Net capital gain
      In general, gain or loss reflected in the value of an 
asset is not recognized for income tax purposes until a 
taxpayer disposes of the asset. On the sale or exchange of a 
capital asset, any gain generally is included in income. Net 
capital gain is the excess of the net long-term capital gain 
for the taxable year over the net short-term capital loss for 
the year. Gain or loss is treated as long-term if the asset is 
held for more than one year.
      A capital asset generally means any property except (1) 
inventory, stock in trade, or property held primarily for sale 
to customers in the ordinary course of the taxpayer's trade or 
business, (2) depreciable or real property used in the 
taxpayer's trade or business, (3) specified literary or 
artistic property, (4) business accounts or notes receivable, 
(5) certain U.S. publications, (6) certain commodity derivative 
financial instruments, (7) hedging transactions, and (8) 
business supplies. In addition, the net gain from the 
disposition of certain property used in the taxpayer's trade or 
business is treated as long-term capital gain. Gain from the 
disposition of depreciable personal property is not treated as 
capital gain to the extent of all previous depreciation 
allowances. Gain from the disposition of depreciable real 
property is generally not treated as capital gain to the extent 
of the depreciation allowances in excess of the allowances 
available under the straight-line method of depreciation.
            Adjusted net capital gain
      The ``adjusted net capital gain'' of an individual is the 
net capital gain reduced (but not below zero) by the sum of the 
28-percent rate gain and the unrecaptured section 1250 gain. 
The net capital gain is reduced by the amount of gain that the 
individual treats as investment income for purposes of 
determining the investment interest limitation under section 
163(d).
            Qualified dividend income
      Adjusted net capital gain is increased by the amount of 
qualified dividend income.
      A dividend is the distribution of property made by a 
corporation to its shareholders out of its after-tax earnings 
and profits. Qualified dividends generally includes dividends 
received from domestic corporations and qualified foreign 
corporations. The term ``qualified foreign corporation'' 
includes a foreign corporation that is eligible for the 
benefits of a comprehensive income tax treaty with the United 
States which the Treasury Department determines to be 
satisfactory and which includes an exchange of information 
program. In addition, a foreign corporation is treated as a 
qualified foreign corporation for any dividend paid by the 
corporation with respect to stock that is readily tradable on 
an established securities market in the United States.
      If a shareholder does not hold a share of stock for more 
than 60 days during the 121-day period beginning 60 days before 
the ex-dividend date (as measured under section 246(c)), 
dividends received on the stock are not eligible for the 
reduced rates. Also, the reduced rates are not available for 
dividends to the extent that the taxpayer is obligated to make 
related payments with respect to positions in substantially 
similar or related property.
      Dividends received from a corporation that is a passive 
foreign investment company (as defined in section 1297) in 
either the taxable year of the distribution, or the preceding 
taxable year, are not qualified dividends.
      A dividend is treated as investment income for purposes 
of determining the amount of deductible investment interest 
only if the taxpayer elects to treat the dividend as not 
eligible for the reduced rates.
      The amount of dividends qualifying for reduced rates that 
may be paid by a regulated investment company (``RIC'') for any 
taxable year in which the qualified dividend income received by 
the RIC is less than 95 percent of its gross income (as 
specially computed) may not exceed the sum of (1) the qualified 
dividend income of the RIC for the taxable year and (2) the 
amount of earnings and profits accumulated in a non-RIC taxable 
year that were distributed by the RIC during the taxable year.
      The amount of qualified dividend income that may be paid 
by a real estate investment trust (``REIT'') for any taxable 
year may not exceed the sum of (1) the qualified dividend 
income of the REIT for the taxable year, (2) an amount equal to 
the excess of the income subject to the taxes imposed by 
section 857(b)(1) and the regulations prescribed under section 
337(d) for the preceding taxable year over the amount of these 
taxes for the preceding taxable year, and (3) the amount of 
earnings and profits accumulated in a non-REIT taxable year 
that were distributed by the REIT during the taxable year.
      Dividends received from an organization that was exempt 
from tax under section 501 or was a tax-exempt farmers' 
cooperative in either the taxable year of the distribution or 
the preceding taxable year; dividends received from a mutual 
savings bank that received a deduction under section 591; or 
deductible dividends paid on employer securities are not 
qualified dividend income.
            28-percent rate gain
      The term ``28-percent rate gain'' means the excess of the 
sum of the amount of net gain attributable to long-term capital 
gains and losses from the sale or exchange of collectibles (as 
defined in section 408(m) without regard to paragraph (3) 
thereof) and the amount of gain equal to the additional amount 
of gain that would be excluded from gross income under section 
1202 (relating to certain small business stock) if the 
percentage limitations of section 1202(a) did not apply, over 
the sum of the net short-term capital loss for the taxable year 
and any long-term capital loss carryover to the taxable year.
            Unrecaptured section 1250 gain
      ``Unrecaptured section 1250 gain'' means any long-term 
capital gain from the sale or exchange of section 1250 property 
(i.e., depreciable real estate) held more than one year to the 
extent of the gain that would have been treated as ordinary 
income if section 1250 applied to all depreciation, reduced by 
the net loss (if any) attributable to the items taken into 
account in computing 28-percent rate gain. The amount of 
unrecaptured section 1250 gain (before the reduction for the 
net loss) attributable to the disposition of property to which 
section 1231 (relating to certain property used in a trade or 
business) applies may not exceed the net section 1231 gain for 
the year.

                               HOUSE BILL

Modification of rates
      The House bill replaces the individual income tax rate 
structure with a new rate structure.

 TABLE 2.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE HOUSE
                                  BILL
------------------------------------------------------------------------
           If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
Not over $45,000..........................  12% of the taxable income
Over $45,000 but not over $200,000........  $5,400 plus 25% of the
                                             excess over $45,000
Over $200,000 but not over $500,000.......  $44,150 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $149,150 plus 39.6% of the
                                             excess over $500,000
------------------------------------------------------------------------
                           Heads of Households
Not over $67,500..........................  12% of the taxable income
Over $67,500 but not over $200,000........  $8,100 plus 25% of the
                                             excess over $67,500
Over $200,000 but not over $500,000.......  $41,225 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $146,225 plus 39.6% of the
                                             excess over $500,000
------------------------------------------------------------------------
     Married Individuals Filing Joint Returns and Surviving Spouses
Not over $90,000..........................  12% of the taxable income
Over $90,000 but not over $260,000........  $10,800 plus 25% of the
                                             excess over $90,000
Over $260,000 but not over $1,000,000.....  $53,300 plus 35% of the
                                             excess over $260,000
Over $1,000,000...........................  $312,300 plus 39.6% of the
                                             excess over $1,000,000
------------------------------------------------------------------------
               Married Individuals Filing Separate Returns
Not over $45,000..........................  12% of the taxable income
Over $45,000 but not over $130,000........  $5,400 plus 25% of the
                                             excess over $45,000
Over $130,000 but not over $500,000.......  $26,650 plus 35% of the
                                             excess over $130,000
Over $500,000.............................  $156,150 plus 39.6% of the
                                             excess over $500,000
------------------------------------------------------------------------
                           Estates and Trusts
Not over $2,550...........................  12% of the taxable income
Over $2,550 but not over $9,150...........  $306 plus 25% of the excess
                                             over $2,550
Over $9,150 but not over $12,500..........  $1,956 plus 35% of the
                                             excess over $9,150
Over $12,500..............................  $3,128.50 plus 39.6% of the
                                             excess over $12,500
------------------------------------------------------------------------

      The dollar amounts for bracket thresholds are all 
adjusted for inflation and then rounded to the next lowest 
multiple of $100 in future years.\12\ Unlike present law, which 
uses a measure of the Consumer Price Index for All Urban 
Consumers (``CPI-U''), the new inflation adjustment uses the 
Chained Consumer Price Index for All Urban Consumers (``C-CPI-
U'').
---------------------------------------------------------------------------
    \12\Some thresholds are defined as 1/2 of dollar amounts and thus 
may be multiples of $50.
---------------------------------------------------------------------------
Phaseout of benefit of the 12-percent bracket
      For taxpayers with adjusted gross income in excess of 
$1,000,000 ($1,200,000 in the case of married taxpayers filing 
jointly), the benefit of the 12-percent bracket, as measured 
against the 39.6-percent bracket, is phased out at a rate of 6-
percent for taxpayers whose AGI is in excess of these amounts. 
Thus, in the case of a married taxpayer filing a joint return, 
if AGI is in excess of $1,200,000, the benefit of $24,840 
(27.6-percent of $90,000) phases out over an income range of 
$414,000. The phaseout thresholds are indexed for inflation.
Simplification of tax on unearned income of children
      The provision simplifies the ``kiddie tax'' by 
effectively applying ordinary and capital gains rates 
applicable to trusts and estates to the net unearned income of 
a child. Thus, as under present law, taxable income 
attributable to earned income is taxed according to an 
unmarried taxpayers' brackets and rates. Taxable income 
attributable to net unearned income is taxed according to the 
brackets applicable to trusts and estates, with respect to both 
ordinary income and income taxed at preferential rates. Thus, 
under the provision, the child's tax is unaffected by the tax 
situation of the child's parent or the unearned income of any 
siblings.
Maximum rates on capital gains and qualified dividends
      The provision generally retains the present-law maximum 
rates on net capital gain and qualified dividends. The 
breakpoints between the zero- and 15-percent rates (``15-
percent breakpoint'') and the 15- and 20-percent rates (``20-
percent breakpoint'') are based on the same amounts as the 
breakpoints under present law, except the breakpoints are 
indexed using the C-CPI-U in taxable years beginning after 
2017. Thus, for 2018, the 15-percent breakpoint is $77,200 for 
joint returns and surviving spouses (one-half of this amount 
for married taxpayers filing separately), $51,700 for heads of 
household, $2,600 for estates and trusts, and $38,600 for other 
unmarried individuals. The 20-percent breakpoint is $479,000 
for joint returns and surviving spouses (one-half of this 
amount for married taxpayers filing separately), $452,400 for 
heads of household, $12,700 for estates and trusts, and 
$425,800 for other unmarried individuals.
      Therefore, in the case of an individual (including an 
estate or trust) with adjusted net capital gain, to the extent 
the gain would not result in taxable income exceeding the 15-
percent breakpoint, such gain is not taxed. Any adjusted net 
capital gain which would result in taxable income exceeding the 
15-percent breakpoint but not exceeding the 20-percent 
breakpoint is taxed at 15 percent. The remaining adjusted net 
capital gain is taxed at 20 percent.
      As under present law, unrecaptured section 1250 gain 
generally is taxed at a maximum rate of 25 percent, and 28-
percent rate gain is taxed at a maximum rate of 28 percent.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

Temporary modification of rates
      The Senate amendment temporarily replaces the individual 
income tax rate structure with a new rate structure.

 TABLE 3.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE SENATE
                                AMENDMENT
------------------------------------------------------------------------
           If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
Not over $9,525...........................  10% of the taxable income
Over $9,525 but not over $38,700..........  $952.50 plus 12% of the
                                             excess over $9,525
Over $38,700 but not over $70,000.........  $4,453.50 plus 22% of the
                                             excess over $38,700
Over $70,000 but not over $160,000........  $11,339.50 plus 24% of the
                                             excess over $70,000
Over $160,000 but not over $200,000.......  $32,939.50 plus 32% of the
                                             excess over $160,000
Over $200,000 but not over $500,000.......  $45,739.50 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $150,739.50 plus 38.5% of
                                             the excess over $500,000
------------------------------------------------------------------------
                           Heads of Households
Not over $13,600..........................  10% of the taxable income
Over $13,600 but not over $51,800.........  $1,360 plus 12% of the
                                             excess over $13,600
Over $51,800 but not over $70,000.........  $5,944 plus 22% of the
                                             excess over $51,800
Over $70,000 but not over $160,000........  $9,948 plus 24% of the
                                             excess over $70,000
Over $160,000 but not over $200,000.......  $31,548 plus 32% of the
                                             excess over $160,000
Over $200,000 but not over $500,000.......  $44,348 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $149,348 plus 38.5% of the
                                             excess over $500,000
------------------------------------------------------------------------
     Married Individuals Filing Joint Returns and Surviving Spouses
Not over $19,050..........................  10% of the taxable income
Over $19,050 but not over $77,400.........  $1,905 plus 12% of the
                                             excess over $19,050
Over $77,400 but not over $140,000........  $8,907 plus 22% of the
                                             excess over $77,400
Over $140,000 but not over $320,000.......  $22,679 plus 24% of the
                                             excess over $140,000
Over $320,000 but not over $400,000.......  $65,879 plus 32% of the
                                             excess over $320,000
Over $400,000 but not over $1,000,000.....  $91,479 plus 35% of the
                                             excess over $400,000
Over $1,000,000...........................  $301,479 plus 38.5% of the
                                             excess over $1,000,000
------------------------------------------------------------------------
               Married Individuals Filing Separate Returns
Not over $9,525...........................  10% of the taxable income
Over $9,525 but not over $38,700..........  $952.50 plus 12% of the
                                             excess over $9,525
Over $38,700 but not over $70,000.........  $4,453.50 plus 22% of the
                                             excess over $38,700
Over $70,000 but not over $160,000........  $11,339.50 plus 24% of the
                                             excess over $70,000
Over $160,000 but not over $200,000.......  $32,939.50 plus 32% of the
                                             excess over $160,000
Over $200,000 but not over $500,000.......  $45,739.50 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $150,739.50 plus 38.5% of
                                             the excess over $500,000
------------------------------------------------------------------------
                           Estates and Trusts
Not over $2,550...........................  10% of the taxable income
Over $2,550 but not over $9,150...........  $255 plus 24% of the excess
                                             over $2,550
Over $9,150 but not over $12,500..........  $1,839 plus 35% of the
                                             excess over $9,150
Over $12,500..............................  $3,011.50 plus 38.5% of the
                                             excess over $12,500
------------------------------------------------------------------------

      Unlike present law, which uses a measure of the CPI-U, 
the new inflation adjustment uses the C-CPI-U.
      The provision's rate structure does not apply to taxable 
years beginning after December 31, 2025.
Temporary simplification of tax on unearned income of children
      The Senate amendment follows the House bill in applying 
ordinary and capital gains rates applicable to trusts and 
estates to the net unearned income of a child, but does not 
apply these changes to taxable years beginning after December 
31, 2025.
Maximum rates on capital gains and qualified dividends
      The Senate amendment follows the House bill and generally 
retains the present-law maximum rates on net capital gain and 
qualified dividends.
Paid preparer due diligence requirement for head of household status
      The Senate amendment directs the Secretary of the 
Treasury to promulgate due diligence requirements for paid 
preparers in determining eligibility for a taxpayer to file as 
head of household. A penalty of $500 is imposed for each 
failure to meet these requirements.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement temporarily replaces the 
existing rate structure with a new rate structure.

    TABLE 4.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE
                          CONFERENCE AGREEMENT
------------------------------------------------------------------------
           If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
Not over $9,525...........................  10% of the taxable income
Over $9,525 but not over $38,700..........  $952.50 plus 12% of the
                                             excess over $9,525
Over $38,700 but not over $82,500.........  $4,453.50 plus 22% of the
                                             excess over $38,700
Over $82,500 but not over $157,500........  $14,089.50 plus 24% of the
                                             excess over $82,500
Over $157,500 but not over $200,000.......  $32,089.50 plus 32% of the
                                             excess over $157,500
Over $200,000 but not over $500,000.......  $45,689.50 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $150,689.50 plus 37% of the
                                             excess over $500,000
------------------------------------------------------------------------
                           Heads of Households
Not over $13,600..........................  10% of the taxable income
Over $13,600 but not over $51,800.........  $1,360 plus 12% of the
                                             excess over $13,600
Over $51,800 but not over $82,500.........  $5,944 plus 22% of the
                                             excess over $51,800
Over $82,500 but not over $157,500........  $12,698 plus 24% of the
                                             excess over $82,500
Over $157,500 but not over $200,000.......  $30,698 plus 32% of the
                                             excess over $157,500
Over $200,000 but not over $500,000.......  $44,298 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $149,298 plus 37% of the
                                             excess over $500,000
------------------------------------------------------------------------
     Married Individuals Filing Joint Returns and Surviving Spouses
Not over $19,050..........................  10% of the taxable income
Over $19,050 but not over $77,400.........  $1,905 plus 12% of the
                                             excess over $19,050
Over $77,400 but not over $165,000........  $8,907 plus 22% of the
                                             excess over $77,400
Over $165,000 but not over $315,000.......  $28,179 plus 24% of the
                                             excess over $165,000
Over $315,000 but not over $400,000.......  $64,179 plus 32% of the
                                             excess over $315,000
Over $400,000 but not over $600,000.......  $91,379 plus 35% of the
                                             excess over $400,000
Over $600,000.............................  $161,379 plus 37% of the
                                             excess over $600,000
------------------------------------------------------------------------
               Married Individuals Filing Separate Returns
Not over $9,525...........................  10% of the taxable income
Over $9,525 but not over $38,700..........  $952.50 plus 12% of the
                                             excess over $9,525
Over $38,700 but not over $82,500.........  $4,453.50 plus 22% of the
                                             excess over $38,700
Over $82,500 but not over $157,500........  $14,089.50 plus 24% of the
                                             excess over $82,500
Over $157,500 but not over $200,000.......  $32,089.50 plus 32% of the
                                             excess over $157,500
Over $200,000 but not over $300,000.......  $45,689.50 plus 35% of the
                                             excess over $200,000
Over $300,000.............................  $80,689.50 plus 37% of the
                                             excess over $300,000
------------------------------------------------------------------------
                           Estates and Trusts
Not over $2,550...........................  10% of the taxable income
Over $2,550 but not over $9,150...........  $255 plus 24% of the excess
                                             over $2,550
Over $9,150 but not over $12,500..........  $1,839 plus 35% of the
                                             excess over $9,150
Over $12,500..............................  $3,011.50 plus 37% of the
                                             excess over $12,500
------------------------------------------------------------------------

      The provision's rate structure does not apply to taxable 
years beginning after December 31, 2025.
      The conference agreement does not follow the House bill 
in phasing out the benefit of the 12-percent bracket for 
taxpayers with adjusted gross income in excess of $1,000,000 
($1,200,000 in the case of married taxpayers filing jointly).
      The conference agreement follows the House bill and 
generally retains present-law maximum rates on net capital 
gains and qualified dividends.
      The conference agreement follows the House bill in 
simplifying the tax on the unearned income of children. This 
provision does not apply to taxable years beginning after 
December 31, 2025.
      The conference agreement follows the Senate amendment and 
directs the Secretary of the Treasury to promulgate due 
diligence requirements for paid preparers in determining 
eligibility for a taxpayer to file as head of household.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.
1. Increase in standard deduction (sec. 1002 of the House bill, sec. 
        11021 of the Senate amendment, and sec. 63 of the Code)

                              PRESENT LAW

      Under present law, an individual who does not elect to 
itemize deductions may reduce his or her adjusted gross income 
(``AGI'') by the amount of the applicable standard deduction in 
arriving at his or her taxable income. The standard deduction 
is the sum of the basic standard deduction and, if applicable, 
the additional standard deduction. The basic standard deduction 
varies depending upon a taxpayer's filing status. For 2017, the 
amount of the basic standard deduction is $6,350 for single 
individuals and married individuals filing separate returns, 
$9,350 for heads of households, and $12,700 for married 
individuals filing a joint return and surviving spouses. An 
additional standard deduction is allowed with respect to any 
individual who is elderly or blind.\13\ The amount of the 
standard deduction is indexed annually for inflation.
---------------------------------------------------------------------------
    \13\For 2017, the additional amount is $1,250 for married taxpayers 
(for each spouse meeting the applicable criterion) and surviving 
spouses. The additional amount for single individuals and heads of 
households is $1,550. An individual who qualifies as both blind and 
elderly is entitled to two additional standard deductions, for a total 
additional amount (for 2017) of $2,500 or $3,100, as applicable.
---------------------------------------------------------------------------
      In the case of a dependent for whom a deduction for a 
personal exemption is allowed to another taxpayer, the standard 
deduction may not exceed the greater of (i) $1,050 (in 2017) or 
(ii) the sum of $350 (in 2017) plus the individual's earned 
income.

                               HOUSE BILL

      The House bill increases the standard deduction for 
individuals across all filing statuses. Under the provision, 
the amount of the standard deduction is $24,400 for married 
individuals filing a joint return, $18,300 for head-of-
household filers, and $12,200 for all other taxpayers. The 
amount of the standard deduction is indexed for inflation using 
the C-CPI-U for taxable years beginning after December 31, 
2019.\14\
---------------------------------------------------------------------------
    \14\Thus, the standard deduction is the same for 2018 and 2019.
---------------------------------------------------------------------------
      The provision eliminates the additional standard 
deduction for the aged and the blind.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment temporarily increases the basic 
standard deduction for individuals across all filing statuses. 
Under the provision, the amount of the standard deduction is 
temporarily increased to $24,000 for married individuals filing 
a joint return, $18,000 for head-of-household filers, and 
$12,000 for all other individuals. The amount of the standard 
deduction is indexed for inflation using the C-CPI-U for 
taxable years beginning after December 31, 2018.
      The additional standard deduction for the elderly and the 
blind is not changed by the provision.
      The increase of the basic standard deduction does not 
apply to taxable years beginning after December 31, 2025.\15\
---------------------------------------------------------------------------
    \15\The standard deduction continues to be indexed with the C-CPI-U 
after this sunset.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
2. Repeal of the deduction for personal exemptions (sec. 1003 of the 
        House bill, sec. 11041 of the Senate amendment, and sec. 151 of 
        the Code)

                              PRESENT LAW

      Under present law, in determining taxable income, an 
individual reduces AGI by any personal exemption deductions and 
either the applicable standard deduction or his or her itemized 
deductions. Personal exemptions generally are allowed for the 
taxpayer, his or her spouse, and any dependents. For 2017, the 
amount deductible for each personal exemption is $4,050. This 
amount is indexed annually for inflation. The personal 
exemption amount is phased out in the case of an individual 
with AGI in excess of $313,800 for married taxpayers filing 
jointly, $287,650 for heads of household, $156,900 for married 
taxpayers filing separately, and $261,500 for all other filers. 
In addition, no personal exemption is allowed in the case of a 
dependent if a deduction is allowed to another taxpayer.
            Withholding rules
      Under present law, the amount of tax required to be 
withheld by employers from a taxpayer's wages is based in part 
on the number of withholding exemptions a taxpayer claims on 
his Form W-4. An employee is entitled to the following 
exemptions: (1) an exemption for himself, unless he allowed to 
be claimed as a dependent of another person; (2) an exemption 
to which the employee's spouse would be entitled, if that 
spouse does not file a Form W-4 for that taxable year claiming 
an exemption described in (1); (3) an exemption for each 
individual who is a dependent (but only if the employee's 
spouse has not also claimed such a withholding exemption on a 
Form W-4); (4) additional withholding allowances (taking into 
account estimated itemized deductions, estimated tax credits, 
and additional deductions as provided by the Secretary of the 
Treasury); and (5) a standard deduction allowance.
            Filing requirements
      Under present law, an unmarried individual is required to 
file a tax return for the taxable year if in that year the 
individual had income which equals or exceeds the exemption 
amount plus the standard deduction applicable to such 
individual (i.e., single, head of household, or surviving 
spouse). An individual entitled to file a joint return is 
required to do so unless that individual's gross income, when 
combined with the individual's spouse's gross income for the 
taxable year, is less than the sum of twice the exemption 
amount plus the basic standard deduction applicable to a joint 
return, provided that such individual and his spouse, at the 
close of the taxable year, had the same household as their 
home.
            Trusts and estates
      In lieu of the deduction for personal exemptions, an 
estate is allowed a deduction of $600. A trust is allowed a 
deduction of $100; $300 if required to distribute all its 
income currently; and an amount equal to the personal exemption 
of an individual in the case of a qualified disability trust.

                               HOUSE BILL

      The House bill repeals the deduction for personal 
exemptions.
      The provision modifies the requirements for those who are 
required to file a tax return. In the case of an individual who 
is not married, such individual is required to file a tax 
return if the taxpayer's gross income for the taxable year 
exceeds the applicable standard deduction. Married individuals 
are required to file a return if that individual's gross 
income, when combined with the individual's spouse's gross 
income, for the taxable year is more than the standard 
deduction applicable to a joint return, provided that: (i) such 
individual and his spouse, at the close of the taxable year, 
had the same household as their home; (ii) the individual's 
spouse does not make a separate return; and (iii) neither the 
individual nor his spouse is a dependent of another taxpayer 
who has income (other than earned income) in excess of $500 
(indexed for inflation).
      The provision repeals the enhanced deduction for 
qualified disability trusts.
      Under the provision, the Secretary of the Treasury is to 
develop rules to determine the amount of tax required to be 
withheld by employers from a taxpayer's wages.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment suspends the deduction for personal 
exemptions.\16\
---------------------------------------------------------------------------
    \16\The provision also clarifies that, for purposes of taxable 
years in which the personal exemption is reduced to zero, this should 
not alter the operation of those provisions of the Code which refer to 
a taxpayer allowed a deduction (or an individual with respect to whom a 
taxpayer is allowed a deduction) under section 151. Thus, for instance, 
sec. 24(a) allows a credit against tax with respect to each qualifying 
child of the taxpayer for which the taxpayer is allowed a deduction 
under section 151. A qualifying child, as defined under section 152(c), 
remains eligible for the credit, notwithstanding that the deduction 
under section 151 has been reduced to zero.
---------------------------------------------------------------------------
      The Senate amendment follows the House bill in modifying 
the requirements for those who are required to file a tax 
return.
      The provision does not apply to taxable years beginning 
after December 31, 2025.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment and 
suspends the deduction for personal exemptions. The suspension 
does not apply to taxable years beginning after December 31, 
2025.
      The conference agreement generally follows the House bill 
in modifying the withholding rules to reflect that taxpayers no 
longer claim personal exemptions under the conference 
agreement.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017. The conference 
agreement provides that the Secretary may administer the 
withholding rules under section 3402 for taxable years 
beginning before January 1, 2019, without regard to the 
amendments made under this provision. Thus, at the Secretary's 
discretion, wage withholding rules may remain the same as under 
present law for 2018.
3. Alternative inflation adjustment (secs. 1001 and 1005 of the House 
        bill, sec. 11002 of the Senate amendment, and sec. 1 of the 
        Code)

                              PRESENT LAW

      Under present law, many parameters of the tax system are 
adjusted for inflation to protect taxpayers from the effects of 
rising prices. Most of the adjustments are based on annual 
changes in the level of the Consumer Price Index for All Urban 
Consumers (``CPI-U'').\17\ The CPI-U is an index that measures 
prices paid by typical urban consumers on a broad range of 
products, and is developed and published by the Department of 
Labor.
---------------------------------------------------------------------------
    \17\Generally, the Code adjusts calendar year values for cost of 
living by using the percentage by which the price index for the 
preceding calendar year exceeds the price index for a base calendar 
year. Sec. 1(f).
---------------------------------------------------------------------------
      Among the inflation-indexed tax parameters are the 
following individual income tax amounts: (1) the regular income 
tax brackets; (2) the basic standard deduction; (3) the 
additional standard deduction for aged and blind; (4) the 
personal exemption amount; (5) the thresholds for the overall 
limitation on itemized deductions and the personal exemption 
phase-out; (6) the phase-in and phase-out thresholds of the 
earned income credit; (7) IRA contribution limits and 
deductible amounts; and (8) the saver's credit.

                               HOUSE BILL

      The House bill requires the use of the Chained Consumer 
Price Index for All Urban Consumers (``C-CPI-U'') to adjust tax 
parameters currently indexed by the CPI-U. The C-CPI-U, like 
the CPI-U, is a measure of the average change over time in 
prices paid by urban consumers. It is developed and published 
by the Department of Labor, but differs from the CPI-U in 
accounting for the ability of individuals to alter their 
consumption patterns in response to relative price changes. The 
C-CPI-U accomplishes this by allowing for consumer substitution 
between item categories in the market basket of consumer goods 
and services that make up the index, while the CPI-U only 
allows for modest substitution within item categories.
      Under the provision, indexed parameters in the Code 
switch from CPI-U indexing to C-CPI-U indexing going forward in 
taxable years beginning after December 31, 2017. Therefore, in 
the case of any existing tax parameters that are not reset for 
2018, the provision indexes parameters as if CPI-U applies 
through 2017 and C-CPI-U applies for years thereafter; the 
provision does not index all existing tax parameters from their 
base years using the C-CPI-U. Tax parameters with cost-of-
living adjustment base years of 2016 and later are indexed 
solely with C-CPI-U. Therefore, tax values that are reset for 
2018 are indexed by the C-CPI-U in taxable years beginning 
after December 31, 2018.\18\
---------------------------------------------------------------------------
    \18\One exception is the increased standard deduction which is 
indexed by C-CPI-U in taxable years beginning after December 31, 2019 
and therefore is the same in 2018 and 2019.
---------------------------------------------------------------------------
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment generally follows the House 
bill.\19\
---------------------------------------------------------------------------
    \19\The Senate Amendment indexes all tax values that are 
temporarily reset for 2018, including the basic standard deduction, 
with the C-CPI-U in taxable years beginning after December 31, 2018.
---------------------------------------------------------------------------
      The provision requiring C-CPI-U indexing after 2017 is 
permanent. Thus, after certain temporary tax parameters sunset, 
such as bracket thresholds and the increased basic standard 
deduction, corresponding present law values in the Code are 
indexed appropriately with the C-CPI-U.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

  B. Treatment of Business Income of Individuals, Trusts, and Estates

1. Deduction for qualified business income (sec. 1004 of the House 
        bill, sec. 11011 of the Senate amendment, and sec. 199A of the 
        Code)

                              PRESENT LAW

Individual income tax rates
      To determine regular tax liability, an individual 
taxpayer generally must apply the tax rate schedules (or the 
tax tables) to his or her regular taxable income. The rate 
schedules are broken into several ranges of income, known as 
income brackets, and the marginal tax rate increases as a 
taxpayer's income increases. Separate rate schedules apply 
based on an individual's filing status (i.e., single, head of 
household, married filing jointly, or married filing 
separately). For 2017, the regular individual income tax rate 
schedule provides rates of 10, 15, 25, 28, 33, 35, and 39.6 
percent.
Partnerships
      Partnerships generally are treated for Federal income tax 
purposes as pass-through entities not subject to tax at the 
entity level.\20\ Items of income (including tax-exempt 
income), gain, loss, deduction, and credit of the partnership 
are taken into account by the partners in computing their 
income tax liability (based on the partnership's method of 
accounting and regardless of whether the income is distributed 
to the partners).\21\ A partner's deduction for partnership 
losses is limited to the partner's adjusted basis in its 
partnership interest.\22\ Losses not allowed as a result of 
that limitation generally are carried forward to the next year. 
A partner's adjusted basis in the partnership interest 
generally equals the sum of (1) the partner's capital 
contributions to the partnership, (2) the partner's 
distributive share of partnership income, and (3) the partner's 
share of partnership liabilities, less (1) the partner's 
distributive share of losses allowed as a deduction and certain 
nondeductible expenditures, and (2) any partnership 
distributions to the partner.\23\ Partners generally may 
receive distributions of partnership property without 
recognition of gain or loss, subject to some exceptions.\24\
---------------------------------------------------------------------------
    \20\Sec. 701.
    \21\Sec. 702(a).
    \22\Sec. 704(d). In addition, passive loss and at-risk limitations 
limit the extent to which certain types of income can be offset by 
partnership deductions (sections 469 and 465). These limitations do not 
apply to corporate partners (except certain closely-held corporations) 
and may not be important to individual partners who have partner-level 
passive income from other investments.
    \23\Sec. 705.
    \24\Sec. 731. Gain or loss may nevertheless be recognized, for 
example, on the distribution of money or marketable securities, 
distributions with respect to contributed property, or in the case of 
disproportionate distributions (which can result in ordinary income).
---------------------------------------------------------------------------
      Partnerships may allocate items of income, gain, loss, 
deduction, and credit among the partners, provided the 
allocations have substantial economic effect.\25\ In general, 
an allocation has substantial economic effect to the extent the 
partner to which the allocation is made receives the economic 
benefit or bears the economic burden of such allocation and the 
allocation substantially affects the dollar amounts to be 
received by the partners from the partnership independent of 
tax consequences.\26\
---------------------------------------------------------------------------
    \25\Sec. 704(b)(2).
    \26\Treas. Reg. sec. 1.704-1(b)(2).
---------------------------------------------------------------------------
      State laws of every State provide for limited liability 
companies\27\ (``LLCs''), which are neither partnerships nor 
corporations under applicable State law, but which are 
generally treated as partnerships for Federal tax purposes.\28\
---------------------------------------------------------------------------
    \27\The first LLC statute was enacted in Wyoming in 1977. All 
States (and the District of Columbia) now have an LLC statute, though 
the tax treatment of LLCs for State tax purposes may differ.
    \28\Under Treasury regulations promulgated in 1996, any domestic 
nonpublicly traded unincorporated entity with two or more members 
generally is treated as a partnership for federal income tax purposes, 
while any single-member domestic unincorporated entity generally is 
treated as disregarded for Federal income tax purposes (i.e., treated 
as not separate from its owner). Instead of the applicable default 
treatment, however, an LLC may elect to be treated as a corporation for 
Federal income tax purposes. Treas. Reg. sec. 301.7701-3. These are 
known as the ``check-the-box'' regulations.
---------------------------------------------------------------------------
      Under present law, a publicly traded partnership 
generally is treated as a corporation for Federal tax 
purposes.\29\ For this purpose, a publicly traded partnership 
means any partnership if interests in the partnership are 
traded on an established securities market or interests in the 
partnership are readily tradable on a secondary market (or the 
substantial equivalent thereof).\30\
---------------------------------------------------------------------------
    \29\Sec. 7704(a).
    \30\Sec. 7704(b).
---------------------------------------------------------------------------
      An exception from corporate treatment is provided for 
certain publicly traded partnerships, 90 percent or more of 
whose gross income is qualifying income.\31\
---------------------------------------------------------------------------
    \31\Sec. 7704(c)(2). Qualifying income is defined to include 
interest, dividends, and gains from the disposition of a capital asset 
(or of property described in section 1231(b)) that is held for the 
production of income that is qualifying income. Sec. 7704(d). 
Qualifying income also includes rents from real property, gains from 
the sale or other disposition of real property, and income and gains 
from the exploration, development, mining or production, processing, 
refining, transportation (including pipelines transporting gas, oil, or 
products thereof), or the marketing of any mineral or natural resource 
(including fertilizer, geothermal energy, and timber), industrial 
source carbon dioxide, or the transportation or storage of certain fuel 
mixtures, alternative fuel, alcohol fuel, or biodiesel fuel. It also 
includes income and gains from commodities (not described in section 
1221(a)(1)) or futures, options, or forward contracts with respect to 
such commodities (including foreign currency transactions of a 
commodity pool) where a principal activity of the partnership is the 
buying and selling of such commodities, futures, options, or forward 
contracts. However, the exception for partnerships with qualifying 
income does not apply to any partnership resembling a mutual fund 
(i.e., that would be described in section 851(a) if it were a domestic 
corporation), which includes a corporation registered under the 
Investment Company Act of 1940 (Pub. L. No. 76-768 (1940)) as a 
management company or unit investment trust (sec. 7704(c)(3)).
---------------------------------------------------------------------------
S corporations
      For Federal income tax purposes, an S corporation\32\ 
generally is not subject to tax at the corporate level.\33\ 
Items of income (including tax-exempt income), gain, loss, 
deduction, and credit of the S corporation are taken into 
account by the S corporation shareholders in computing their 
income tax liabilities (based on the S corporation's method of 
accounting and regardless of whether the income is distributed 
to the shareholders). A shareholder's deduction for corporate 
losses is limited to the sum of the shareholder's adjusted 
basis in its S corporation stock and the indebtedness of the S 
corporation to such shareholder. Losses not allowed as a result 
of that limitation generally are carried forward to the next 
year. A shareholder's adjusted basis in the S corporation stock 
generally equals the sum of (1) the shareholder's capital 
contributions to the S corporation and (2) the shareholder's 
pro rata share of S corporation income, less (1) the 
shareholder's pro rata share of losses allowed as a deduction 
and certain nondeductible expenditures, and (2) any S 
corporation distributions to the shareholder.\34\
---------------------------------------------------------------------------
    \32\An S corporation is so named because its Federal tax treatment 
is governed by subchapter S of the Code.
    \33\Secs. 1363 and 1366.
    \34\Sec. 1367. If any amount that would reduce the adjusted basis 
of a shareholder's S corporation stock exceeds the amount that would 
reduce that basis to zero, the excess is applied to reduce (but not 
below zero) the shareholder's basis in any indebtedness of the S 
corporation to the shareholder. If, after a reduction in the basis of 
such indebtedness, there is an event that would increase the adjusted 
basis of the shareholder's S corporation stock, such increase is 
instead first applied to restore the reduction in the basis of the 
shareholder's indebtedness. Sec. 1367(b)(2).
---------------------------------------------------------------------------
      In general, an S corporation shareholder is not subject 
to tax on corporate distributions unless the distributions 
exceed the shareholder's basis in the stock of the corporation.
            Electing S corporation status
      To be eligible to elect S corporation status, a 
corporation may not have more than 100 shareholders and may not 
have more than one class of stock.\35\ Only individuals (other 
than nonresident aliens), certain tax-exempt organizations, and 
certain trusts and estates are permitted shareholders of an S 
corporation.
---------------------------------------------------------------------------
    \35\Sec. 1361. For this purpose, a husband and wife and all members 
of a family are treated as one shareholder. Sec. 1361(c)(1).
---------------------------------------------------------------------------
Sole proprietorships
      Unlike a C corporation, partnership, or S corporation, a 
business conducted as a sole proprietorship is not treated as 
an entity distinct from its owner for Federal income tax 
purposes.\36\ Rather, the business owner is taxed directly on 
business income, and files Schedule C (sole proprietorships 
generally), Schedule E (rental real estate and royalties), or 
Schedule F (farms) with his or her individual tax return. 
Furthermore, transfer of a sole proprietorship is treated as a 
transfer of each individual asset of the business. Nonetheless, 
a sole proprietorship is treated as an entity separate from its 
owner for employment tax purposes,\37\ for certain excise 
taxes,\38\ and certain information reporting requirements.\39\
---------------------------------------------------------------------------
    \36\A single-member unincorporated entity is disregarded for 
Federal income tax purposes, unless its owner elects to be treated as a 
C corporation. Treas. Reg. sec. 301.7701-3(b)(1)(ii). Sole 
proprietorships often are conducted through legal entities for nontax 
reasons. While sole proprietorships generally may have no more than one 
owner, a married couple that files a joint return and jointly owns and 
operates a business may elect to have that business treated as a sole 
proprietorship under section 761(f).
    \37\Treas. Reg. sec. 301.7701-2(c)(2)(iv).
    \38\Treas. Reg. sec. 301.7701-2(c)(2)(v).
    \39\Treas. Reg. sec. 301.7701-2(c)(2)(vi).
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                               HOUSE BILL

      Qualified business income of an individual from a 
partnership, S corporation, or sole proprietorship is subject 
to Federal income tax at a rate no higher than 25 percent. 
Qualified business income means, generally, all net business 
income from a passive business activity plus the capital 
percentage of net business income from an active business 
activity, reduced by carryover business losses and by certain 
net business losses from the current year, as determined under 
the provision.
Determination of rate
            25-percent rate
      The provision provides that an individual's tax is 
reduced to reflect a maximum rate of 25 percent on qualified 
business income. Qualified business income includes the capital 
percentage, generally 30 percent, of net business income. The 
percentage differs in the case of specified service activities 
or in the case of a taxpayer election to prove out a different 
percentage.
      Taxable income (reduced by net capital gain) that exceeds 
the maximum dollar amount for the 25-percent rate bracket 
applicable to the taxpayer, and that exceeds qualified business 
income, is subject to tax in the next higher brackets.
      The provision provides that a 25-percent tax rate applies 
generally to dividends received from a real estate investment 
trust (other than any portion that is a capital gain dividend 
or a qualified dividend), and applies generally to dividends 
that are includable in gross income from certain cooperatives.
            Nine-percent rate
      A special rule provides a reduced tax rate of 11, 10, or 
nine percent in the case of an individual's qualified active 
business income below an indexed threshold of $75,000 (in the 
case of a joint return or a surviving spouse) (the ``nine-
percent bracket threshold amount''). The indexed $75,000 
threshold is three quarters of that amount for individuals 
filing as head of household and half that amount for other 
individuals. The reduced rate is not available to estates and 
trusts.
      The reduced rate is phased in. The reduced rate is 11 
percent (that is, one percentage point below the 12 percent 
rate) for taxable years beginning in 2018 and 2019, and is 10 
percent (that is, two percentage points below the 12 percent 
rate) for taxable years beginning in 2020 and 2021. For taxable 
years beginning in 2022 and thereafter the reduced rate is nine 
percent (that is, three percentage points below the 12 percent 
rate).
      The reduced tax rate applies to the least of three 
amounts, the taxpayer's: (1) qualified active business income, 
(2) taxable income reduced by net capital gain, or (3) nine-
percent bracket threshold amount (described above). Qualified 
active business income for a taxable year means the excess of 
the taxpayer's net business income from any active business 
activity over his or her net business loss from any active 
business activity. An active business activity is an activity 
that involves the conduct of any trade or business and that is 
not a passive activity for purposes of the passive loss rules 
of section 469 determined without regard to paragraphs (2) and 
(6)(B) of section 469(c) (that is, generally, the taxpayer 
materially participates in the trade or business activity). 
Qualified active business income includes income from any trade 
or business activity, including service businesses. No capital 
percentage limitation applies in determining qualified active 
business income.
      A phaseout applies to the amount subject to the 11-, 10-, 
or nine-percent rate. The amount taxed at one of these rates is 
reduced by the excess of taxable income over an indexed 
applicable threshold amount, $150,000 in the case of married 
individuals filing jointly. The applicable threshold amount is 
three quarters of that amount for individuals filing as head of 
household and half that amount for other individuals.
      For example, assume that in 2022, an individual (married 
filing jointly) has $70,000 of qualified active business income 
and $40,000 of other income, resulting in taxable income of 
$110,000. The $70,000 of qualified active business income is 
subject to tax at nine percent. Alternatively, assume that in 
2022, another individual has $160,000 of qualified active 
business income and $10,000 of other income resulting in 
taxable income of $170,000. The excess of the taxpayer's 
$170,000 taxable income over the $150,000 applicable threshold 
amount is $20,000. Taking into account the phaseout, this 
$20,000 amount reduces the $75,000 amount that, absent the 
phaseout, would be subject to the nine-percent rate, reversing 
the benefit of the nine-percent rate for $20,000 of the 
taxpayer's qualified active business income. The effect is that 
$55,000 is subject to the nine percent rate.
Qualified business income
      Qualified business income is defined as the sum of 100 
percent of any net business income derived from any passive 
business activity plus the capital percentage of net business 
income derived from any active business activity, reduced by 
the sum of 100 percent of any net business loss derived from 
any passive business activity, 30 percent (except as otherwise 
provided under rules for determining the capital percentage, 
below) of any net business loss derived from any active 
business activity, and any carryover business loss determined 
for the preceding taxable year. Qualified business income does 
not include income from a business activity that exceeds these 
percentages.
            Net business income or loss
      To determine qualified business income requires a 
calculation of net business income or loss from each of an 
individual's passive business activities and active business 
activities. Net business income or loss is determined at the 
activity level, that is, separately for each business activity.
      Net business income is determined by appropriately 
netting items of income, gain, deduction and loss with respect 
to the business activity. The determination takes into account 
these amounts only to the extent the amount affects the 
determination of taxable income for the year. For example, if 
in a taxable year, a business activity has 100 of ordinary 
income from inventory sales, and makes an expenditure of 25 
that is required to be capitalized and amortized over 5 years 
under applicable tax rules, the net business income is 100 
minus 5 (current-year ordinary amortization deduction), or 95. 
The net business income is not reduced by the entire amount of 
the capital expenditure, only by the amount deductible in 
determining taxable income for the year.
      Net business income or loss includes the amounts received 
by the individual taxpayer as wages, director's fees, 
guaranteed payments and amounts received from a partnership 
other than in the individual's capacity as a partner, that are 
properly attributable to a business activity. These amounts are 
taken into account as an item of income with respect to the 
business activity. For example, if an individual shareholder of 
an S corporation engaged in a business activity is paid wages 
or director's fees by the S corporation, the amount of wages or 
director's fees is added in determining net business or loss 
with respect to the business activity. This rule is intended to 
ensure that the amount eligible for the 25-percent tax rate is 
not erroneously reduced because of compensation for services or 
other specified amounts that are paid separately (or treated as 
separate) from the individual's distributive share of 
passthrough income.
      Net business income or loss does not include specified 
investment-related income, deductions, or loss. Specifically, 
net business income does not include (1) any item taken into 
account in determining net long-term capital gain or net long-
term capital loss, (2) dividends, income equivalent to a 
dividend, or payments in lieu of dividends, (3) interest income 
and income equivalent to interest, other than that which is 
properly allocable to a trade or business, (4) the excess of 
gain over loss from commodities transactions, other than those 
entered into in the normal course of the trade or business or 
with respect to stock in trade or property held primarily for 
sale to customers in the ordinary course of the trade or 
business, property used in the trade or business, or supplies 
regularly used or consumed in the trade or business, (5) the 
excess of foreign currency gains over foreign currency losses 
from section 988 transactions, other than transactions directly 
related to the business needs of the business activity, (6) net 
income from notional principal contracts, other than clearly 
identified hedging transactions that are treated as ordinary 
(i.e., not treated as capital assets), and (7) any amount 
received from an annuity that is not used in the trade or 
business of the business activity. Net business income does not 
include any item of deduction or loss properly allocable to 
such income.
            Carryover business loss
      The carryover business loss from the preceding taxable 
year reduces qualified business income in the taxable year. The 
carryover business loss is the excess of (1) the sum of 100 
percent of any net business loss derived from any passive 
business activity, 30 percent (except as otherwise provided 
under rules for determining the capital percentage, below) of 
any net business loss derived from any active business 
activity, and any carryover business loss determined for the 
preceding taxable year, over (2) the sum of 100 percent of any 
net business income derived from any passive business activity 
plus the capital percentage of net business income derived from 
any active business activity. There is no time limit on 
carryover business losses. For example, an individual has two 
business activities that give rise to a net business loss of 3 
and 4, respectively, in year one, giving rise to a carryover 
business loss of 7 in year two. If in year two the two business 
activities each give rise to net business income of 2, a 
carryover business loss of 3 is carried to year three (that is, 
<7> - (2 + 2) = <3>).
            Passive business activity and active business activity
      A business activity means an activity that involves the 
conduct of any trade or business. A taxpayer's activities 
include those conducted through partnerships, S corporations, 
and sole proprietorships. An activity has the same meaning as 
under the present-law passive loss rules (section 469). As 
provided in regulations under those rules, a taxpayer may use 
any reasonable method of applying the relevant facts and 
circumstances in grouping activities together or as separate 
activities (through rental activities generally may not be 
grouped with other activities unless together they constitute 
an appropriate economic unit, and grouping real property 
rentals with personal property rentals is not permitted). It is 
intended that the activity grouping the taxpayer has selected 
under the passive loss rules is required to be used for 
purposes of the passthrough rate rules. For example, an 
individual taxpayer has an interest in a bakery and a movie 
theater in Baltimore, and a bakery and a movie theatre in 
Philadelphia. For purposes of the passive loss rules, the 
taxpayer has grouped them as two activities, a bakery activity 
and a movie theatre activity. The taxpayer must group them the 
same way that is as two activities, a bakery activity and a 
movie theatre activity, for purposes of rules of this 
provision.
      Regulatory authority is provided to require or permit 
grouping as one or as multiple activities in particular 
circumstances, in the case of specified services activities 
that would be treated as a single employer under broad related 
party rules of present law.
      A passive business activity generally has the same 
meaning as a passive activity under the present-law passive 
loss rules. However, for this purpose, a passive business 
activity is not defined to exclude a working interest in any 
oil or gas property that the taxpayer holds directly or through 
an entity that does not limit the taxpayer's liability. Rather, 
whether the taxpayer materially participates in the activity is 
relevant. Further, for this purpose, a passive business 
activity does not include an activity in connection with a 
trade or business or in connection with the production of 
income.
      An active business activity is an activity that involves 
the conduct of any trade or business and that is not a passive 
activity. For example, if an individual has a partnership 
interest in a manufacturing business and materially 
participates in the manufacturing business, it is considered an 
active business activity of the individual.
            Capital percentage
      The capital percentage is the percentage of net business 
income from an active business activity that is included in 
qualified business income subject to Federal income tax at a 
rate no higher than 25 percent.
      In general, the capital percentage is 30 percent, except 
as provided in the case of application of an increased 
percentage for capital-intensive business activities, in the 
case of specified service activities, and in the case of 
application of the rule for capital-intensive specified service 
activities.
      The capital percentage is reduced if the portion of net 
business income represented by the sum of wages, director's 
fees, guaranteed payments and amounts received from a 
partnership other than in the individual's capacity as a 
partner, that are properly attributable to a business activity 
exceeds the difference between 100 percent and the capital 
percentage. For example, if net business income from an 
individual's active business activity conducted through an S 
corporation is 100, including 75 of wages that the S 
corporation pays the individual, the otherwise applicable 
capital percentage is reduced from 30 percent to 25 percent.
      Increased percentage for capital-intensive business 
activities.--A taxpayer may elect the application of an 
increased percentage with respect to any active business 
activity other than a specified service activity (described 
below). The election applies for the taxable year it is made 
and each of the next four taxable years. The election is to be 
made no later than the due date (including extensions) of the 
return for the taxable year made, and is irrevocable. The 
percentage under the election is the applicable percentage 
(described below) for the five taxable years of the election.
      Specified service activities.--In the case of an active 
business activity that is a specified service activity, 
generally the capital percentage is 0 and the percentage of any 
net business loss from the specified service activity that is 
taken into account as qualified business income is 0 percent.
      A specified service activity means any trade or business 
activity involving the performance of services in the fields of 
health, law, engineering, architecture, accounting, actuarial 
science, performing arts, consulting, athletics, financial 
services, brokerage services, any trade or business where the 
principal asset of such trade or business is the reputation or 
skill of one or more of its employees, or investing, trading, 
or dealing in securities, partnership interests, or 
commodities. For this purpose a security and a commodity have 
the meanings provided in the rules for the mark-to-market 
accounting method for dealers in securities (sections 475(c)(2) 
and 475(e)(2), respectively).
      Capital-intensive specified service activities.--A 
taxpayer may elect the application of an exception with respect 
to any active business activity that is specified service 
activity, provided the applicable percentage (described below) 
for the taxable year is at least 10 percent. If the election is 
validly made, the capital percentage and the percentage of net 
business loss with respect to the activity are not 0 percent, 
but rather, the applicable percentage for the taxable year.
      Calculation of applicable percentage.--The applicable 
percentage is the percentage applied in lieu of the capital 
percentage in the case of either of the foregoing elections. 
The applicable percentage (not the capital percentage) then 
determines the portion of the net business income or loss from 
the activity for the taxable year that is taken into account in 
determining qualified business income subject to Federal income 
tax at a rate no higher than 25 percent.
      The applicable percentage is determined by dividing (1) 
the specified return on capital for the activity for the 
taxable year, by (2) the taxpayer's net business income derived 
from that activity for that taxable year. The specified return 
on capital for any active business activity is determined by 
multiplying a deemed rate of return, the short-term AFR plus 7 
percentage points, times the asset balance for the activity for 
the taxable year, and reducing the product by interest expense 
deducted with respect to the activity for the taxable year. The 
asset balance for this purpose is the adjusted basis of 
property used in connection with the activity as of the end of 
the taxable year, but without taking account of basis 
adjustments for bonus depreciation under section 168(k) or 
expensing under section 179. In the case of an active business 
activity conducted through a partnership or S corporation, the 
taxpayer takes into account his distributive share of the asset 
balance of the partnership's or S corporation's property used 
in connection with the activity. Regulatory authority is 
provided to ensure that in determining asset balance, no amount 
is taken into account for more than one activity.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017. A transition rule 
provides that for fiscal year taxpayers whose taxable year 
includes December 31, 2017, a proportional benefit of the 
reduced rate under the provision is allowed for the period 
beginning January 1, 2018, and ending on the day before the 
beginning of the taxable year beginning after December 31, 
2017.

                            SENATE AMENDMENT

In general
      For taxable years beginning after December 31, 2017 and 
before January 1, 2026, an individual taxpayer generally may 
deduct 23 percent of qualified business income from a 
partnership, S corporation, or sole proprietorship, as well as 
23 percent of aggregate qualified REIT dividends, qualified 
cooperative dividends, and qualified publicly traded 
partnership income. Special rules apply to specified 
agricultural or horticultural cooperatives. A limitation based 
on W-2 wages paid is phased in above a threshold amount of 
taxable income. A disallowance of the deduction with respect to 
specified service trades or businesses is also phased in above 
the threshold amount of taxable income.\40\
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    \40\For purposes of this provision, taxable income is computed 
without regard to the 23 percent deduction.
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Qualified business income
      Qualified business income is determined for each 
qualified trade or business of the taxpayer. For any taxable 
year, qualified business income means the net amount of 
qualified items of income, gain, deduction, and loss with 
respect to the qualified trade or business of the taxpayer. The 
determination of qualified items of income, gain, deduction, 
and loss takes into account these items only to the extent 
included or allowed in the determination of taxable income for 
the year. For example, if in a taxable year, a qualified 
business has $100,000 of ordinary income from inventory sales, 
and makes an expenditure of $25,000 that is required to be 
capitalized and amortized over 5 years under applicable tax 
rules, the qualified business income is $100,000 minus $5,000 
(current-year ordinary amortization deduction), or $95,000. The 
qualified business income is not reduced by the entire amount 
of the capital expenditure, only by the amount deductible in 
determining taxable income for the year.
      If the net amount of qualified business income from all 
qualified trades or businesses during the taxable year is a 
loss, it is carried forward as a loss from a qualified trade or 
business in the next taxable year. Similar to a qualified trade 
or business that has a qualified business loss for the current 
taxable year, any deduction allowed in a subsequent year is 
reduced (but not below zero) by 23 percent of any carryover 
qualified business loss. For example, Taxpayer has qualified 
business income of $20,000 from qualified business A and a 
qualified business loss of $50,000 from qualified business B in 
Year 1. Taxpayer is not permitted a deduction for Year 1 and 
has a carryover qualified business loss of $30,000 to Year 2. 
In Year 2, Taxpayer has qualified business income of $20,000 
from qualified business A and qualified business income of 
$50,000 from qualified business B. To determine the deduction 
for Year 2, Taxpayer reduces the 23 percent deductible amount 
determined for the qualified business income of $70,000 from 
qualified businesses A and B by 23 percent of the $30,000 
carryover qualified business loss.
            Domestic business
      Items are treated as qualified items of income, gain, 
deduction, and loss only to the extent they are effectively 
connected with the conduct of a trade or business within the 
United States.\41\ In the case of a taxpayer who is an 
individual with otherwise qualified business income from 
sources within the commonwealth of Puerto Rico, if all the 
income is taxable under section 1 (income tax rates for 
individuals) for the taxable year, the ``United States'' is 
considered to include Puerto Rico for purposes of determining 
the individual's qualified business income.
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    \41\For this purpose, section 864(c) is applied substituting 
``qualified trade or business (within the meaning of section 199A)'' 
for ``nonresident alien individual or a foreign corporation'' or ``a 
foreign corporation.''
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            Treatment of investment income
      Qualified items do not include specified investment-
related income, deductions, or loss. Specifically, qualified 
items of income, gain, deduction and loss do not include (1) 
any item taken into account in determining net long-term 
capital gain or net long-term capital loss, (2) dividends, 
income equivalent to a dividend, or payments in lieu of 
dividends, (3) interest income other than that which is 
properly allocable to a trade or business, (4) the excess of 
gain over loss from commodities transactions, other than those 
entered into in the normal course of the trade or business or 
with respect to stock in trade or property held primarily for 
sale to customers in the ordinary course of the trade or 
business, property used in the trade or business, or supplies 
regularly used or consumed in the trade or business, (5) the 
excess of foreign currency gains over foreign currency losses 
from section 988 transactions, other than transactions directly 
related to the business needs of the business activity, (6) net 
income from notional principal contracts, other than clearly 
identified hedging transactions that are treated as ordinary 
(i.e., not treated as capital assets), and (7) any amount 
received from an annuity that is not used in the trade or 
business of the business activity. Qualified items under this 
provision do not include any item of deduction or loss properly 
allocable to such income.
            Reasonable compensation and guaranteed payments
      Qualified business income does not include any amount 
paid by an S corporation that is treated as reasonable 
compensation of the taxpayer. Similarly, qualified business 
income does not include any guaranteed payment for services 
rendered with respect to the trade or business,\42\ and to the 
extent provided in regulations, does not include any amount 
paid or incurred by a partnership to a partner who is acting 
other than in his or her capacity as a partner for 
services.\43\
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    \42\Described in sec. 707(c).
    \43\Described in sec. 707(a).
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            Qualified trade or business
      A qualified trade or business means any trade or business 
other than a specified service trade or business and other than 
the trade or business of being an employee.
            Specified service business
      A specified service trade or business means any trade or 
business involving the performance of services in the fields of 
health,\44\ law, engineering, architecture, accounting, 
actuarial science, performing arts,\45\ consulting,\46\ 
athletics, financial services, brokerage services, including 
investing and investment management, trading, or dealing in 
securities, partnership interests, or commodities, and any 
trade or business where the principal asset of such trade or 
business is the reputation or skill of one or more of its 
employees. For this purpose a security and a commodity have the 
meanings provided in the rules for the mark-to-market 
accounting method for dealers in securities (sections 475(c)(2) 
and 475(e)(2), respectively).
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    \44\A similar list of service trades or business is provided in 
section 448(d)(2)(A) and Treas. Reg. sec. 1.448-1T(e)(4)(i). For 
purposes of section 448, Treasury regulations provide that the 
performance of services in the field of health means the provision of 
medical services by physicians, nurses, dentists, and other similar 
healthcare professionals. The performance of services in the field of 
health does not include the provision of services not directly related 
to a medical field, even though the services may purportedly relate to 
the health of the service recipient. For example, the performance of 
services in the field of health does not include the operation of 
health clubs or health spas that provide physical exercise or 
conditioning to their customers. See Treas. Reg. sec. 1.448-
1T(e)(4)(ii).
    \45\For purposes of the similar list of services in section 448, 
Treasury regulations provide that the performance of services in the 
field of the performing arts means the provision of services by actors, 
actresses, singers, musicians, entertainers, and similar artists in 
their capacity as such. The performance of services in the field of the 
performing arts does not include the provision of services by persons 
who themselves are not performing artists (e.g., persons who may manage 
or promote such artists, and other persons in a trade or business that 
relates to the performing arts). Similarly, the performance of services 
in the field of the performing arts does not include the provision of 
services by persons who broadcast or otherwise disseminate the 
performance of such artists to members of the public (e.g., employees 
of a radio station that broadcasts the performances of musicians and 
singers). See Treas. Reg. sec. 1.448-1T(e)(4)(iii).
    \46\For purposes of the similar list of services in section 448, 
Treasury regulations provide that the performance of services in the 
field of consulting means the provision of advice and counsel. The 
performance of services in the field of consulting does not include the 
performance of services other than advice and counsel, such as sales or 
brokerage services, or economically similar services. For purposes of 
the preceding sentence, the determination of whether a person's 
services are sales or brokerage services, or economically similar 
services, shall be based on all the facts and circumstances of that 
person's business. Such facts and circumstances include, for example, 
the manner in which the taxpayer is compensated for the services 
provided (e.g., whether the compensation for the services is contingent 
upon the consummation of the transaction that the services were 
intended to effect). See Treas. Reg. sec. 1.448-1T(e)(4)(iv).
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            Phase-in of specified service business limitation
      The exclusion from the definition of a qualified business 
for specified service trades or businesses phases in for a 
taxpayer with taxable income in excess of a threshold amount. 
The threshold amount is $250,000 (200 percent of that amount, 
or $500,000, in the case of a joint return) (the ``threshold 
amount''). The threshold amount is indexed for inflation. The 
exclusion from the definition of a qualified business for 
specified service trades or businesses is fully phased in for a 
taxpayer with taxable income in excess of the threshold amount 
plus $50,000 ($100,000 in the case of a joint return). For a 
taxpayer with taxable income within the phase-in range, the 
exclusion applies as follows.
      In computing the qualified business income with respect 
to a specified service trade or business, the taxpayer takes 
into account only the applicable percentage of qualified items 
of income, gain, deduction, or loss, and of allocable W-2 
wages. The applicable percentage with respect to any taxable 
year is 100 percent reduced by the percentage equal to the 
ratio of the excess of the taxable income of the taxpayer over 
the threshold amount bears to $50,000 ($100,000 in the case of 
a joint return).
      For example, Taxpayer has taxable income of $280,000, of 
which $200,000 is attributable to an accounting sole 
proprietorship after paying wages of $100,000 to employees. 
Taxpayer has an applicable percentage of 40 percent.\47\ In 
determining includible qualified business income, Taxpayer 
takes into account 40 percent of $200,000, or $80,000. In 
determining the includible W-2 wages, Taxpayer takes into 
account 40 percent of $100,000, or $40,000. Taxpayer calculates 
the deduction by taking the lesser of 23 percent of $80,000 
($18,400) or 50 percent of $40,000 ($20,000). Taxpayer takes a 
deduction for $18,400.
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    \47\1 - ($280,000 - $250,000)/$50,000 = 1 - 30,000/50,000 = 1 -.6 = 
40 percent.
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Tentative deductible amount for a qualified trade or business
            In general
      For each qualified trade or business, the taxpayer is 
allowed a deductible amount equal to the lesser of 23 percent 
of the qualified business income with respect to such trade or 
business or 50 percent of the W-2 wages with respect to such 
business (the ``wage limit''). However, if the taxpayer's 
taxable income is below the threshold amount, the deductible 
amount for each qualified trade or business is equal to 23 
percent of the qualified business income with respect to each 
respective trade or business.
            W-2 wages
      W-2 wages are the total wages\48\ subject to wage 
withholding, elective deferrals,\49\ and deferred 
compensation\50\ paid by the qualified trade or business with 
respect to employment of its employees during the calendar year 
ending during the taxable year of the taxpayer.\51\ W-2 wages 
do not include any amount which is not properly allocable to 
the qualified business income as a qualified item of deduction. 
In addition, W-2 wages do not include any amount which was not 
properly included in a return filed with the Social Security 
Administration on or before the 60th day after the due date 
(including extensions) for such return.
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    \48\Defined in sec. 3401(a).
    \49\Within the meaning of sec. 402(g)(3).
    \50\Deferred compensation includes compensation deferred under 
section 457, as well as the amount of any designated Roth contributions 
(as defined in section 402A).
    \51\In the case of a taxpayer with a short taxable year that does 
not contain a calendar year ending during such short taxable year, the 
Committee intends that the following amounts shall be treated as the W-
2 wages of the taxpayer for the short taxable year: (1) only those 
wages paid during the short taxable year to employees of the qualified 
trade or business, (2) only those elective deferrals (within the 
meaning of section 402(g)(3)) made during the short taxable year by 
employees of the qualified trade or business, and (3) only compensation 
actually deferred under section 457 during the short taxable year with 
respect to employees of the qualified trade or business. The Committee 
intends that amounts that are treated as W-2 wages for a taxable year 
shall not be treated as W-2 wages of any other taxable year.
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      In the case of a taxpayer who is an individual with 
otherwise qualified business income from sources within the 
commonwealth of Puerto Rico, if all the income is taxable under 
section 1 (income tax rates for individuals) for the taxable 
year, the determination of W-2 wages with respect to the 
taxpayer's trade or business conducted in Puerto Rico is made 
without regard to any exclusion under the wage withholding 
rules\52\ for remuneration paid for services in Puerto Rico.
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    \52\As provided in sec. 3401(a)(8).
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            Phase-in of wage limit
      The application of the wage limit phases in for a 
taxpayer with taxable income in excess of the threshold amount. 
The wage limit applies fully for a taxpayer with taxable income 
in excess of the threshold amount plus $50,000 ($100,000 in the 
case of a joint return). For a taxpayer with taxable income 
within the phase-in range, the wage limit applies as follows.
      With respect to any qualified trade or business, the 
taxpayer compares (1) 23 percent of the taxpayer's qualified 
business income with respect to the qualified trade or business 
with (2) 50 percent of the W-2 wages with respect to the 
qualified trade or business. If the amount determined under (2) 
is less than the amount determined (1), (that is, if the wage 
limit is binding), the taxpayer's deductible amount is the 
amount determined under (1) reduced by the same proportion of 
the difference between the two amounts as the excess of the 
taxable income of the taxpayer over the threshold amount bears 
to $50,000 ($100,000 in the case of a joint return).
      For example, H and W file a joint return on which they 
report taxable income of $520,000. W has a qualified trade or 
business that is not a specified service business, such that 23 
percent of the qualified business income with respect to the 
business is $15,000. W's share of wages paid by the business is 
$20,000, such that 50 percent of the W-2 wages with respect to 
the business is $10,000. The $15,000 amount is reduced by 20 
percent\53\ of the difference between $15,000 and $10,000, or 
$1,000. H and W take a deduction for $14,000.
---------------------------------------------------------------------------
    \53\($520,000- $500,000)/$100,000 = 20 percent.
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Qualified REIT dividends, cooperative dividends, and publicly traded 
        partnership income
      A deduction is allowed under the provision for 23 percent 
of the taxpayer's aggregate amount of qualified REIT dividends, 
qualified cooperative dividends, and qualified publicly traded 
partnership income for the taxable year. Qualified REIT 
dividends do not include any portion of a dividend received 
from a REIT that is a capital gain dividend\54\ or a qualified 
dividend.\55\ A qualified cooperative dividend means a 
patronage dividend,\56\ per-unit retain allocation,\57\ 
qualified written notice of allocation,\58\ or any similar 
amount, provided it is includible in gross income and is 
received from either (1) a tax-exempt benevolent life insurance 
association, mutual ditch or irrigation company, cooperative 
telephone company, like cooperative organization,\59\ or a 
taxable or tax-exempt cooperative that is described in section 
1381(a), or (2) a taxable cooperative governed by tax rules 
applicable to cooperatives before the enactment of subchapter T 
of the Code in 1962. Qualified publicly traded partnership 
income means (with respect to any qualified trade or business 
of the taxpayer), the sum of the (a) net amount of the 
taxpayer's allocable share of each qualified item of income, 
gain, deduction, and loss (that are effectively connected with 
a U.S. trade or business and are included or allowed in 
determining taxable income for the taxable year and do not 
constitute excepted enumerated investment-type income, and not 
including the taxpayer's reasonable compensation, guaranteed 
payments for services, or (to the extent provided in 
regulations) section 707(a) payments for services) from a 
publicly traded partnership not treated as a corporation, and 
(b) gain recognized by the taxpayer on disposition of its 
interest in the partnership that is treated as ordinary income 
(for example, by reason of section 751).
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    \54\Defined in sec. 857(b)(3).
    \55\Defined in sec. 1(h)(11).
    \56\Defined in sec. 1388(a).
    \57\Defined in sec. 1388(f).
    \58\Defined in sec. 1388(c).
    \59\Described in sec. 501(c)(12).
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Determination of the taxpayer's deduction
      The taxpayer's deduction for qualified business income is 
equal to the lesser of the combined qualified business income 
amount for the taxable year or an amount equal to 23 percent of 
the taxpayer's taxable income (reduced by any net capital 
gain\60\) for the taxable year. The combined qualified business 
income amount is the sum of the deductible amounts determined 
for each qualified trade or business for the taxable year and 
23 percent of the qualified REIT dividends and qualified 
cooperative dividends received by the taxpayer for the taxable 
year.
---------------------------------------------------------------------------
    \60\Defined in sec. 1(h).
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Specified agricultural or horticultural cooperatives
      For taxable years beginning after December 31, 2018 but 
not after December 31, 2025, a deduction is allowed to any 
specified agricultural or horticultural cooperative equal to 
the lesser of 23 percent of the cooperative's taxable income 
for the taxable year or 50 percent of the W-2 wages paid by the 
cooperative with respect to its trade or business. A specified 
agricultural or horticultural cooperative is an organization to 
which subchapter T applies that is engaged in (a) the 
manufacturing, production, growth, or extraction in whole or 
significant part of any agricultural or horticultural product, 
(b) the marketing of agricultural or horticultural products 
that its patrons have so manufactured, produced, grown, or 
extracted, or (c) the provision of supplies, equipment, or 
services to farmers or organizations described in the 
foregoing.
Special rules and definitions
      For purposes of the provision, taxable income is 
determined without regard to the deduction allowable under the 
provision.
      In the case of a partnership or S corporation, the 
provision applies at the partner or shareholder level. Each 
partner takes into account the partner's allocable share of 
each qualified item of income, gain, deduction, and loss, and 
is treated as having W-2 wages for the taxable year equal to 
the partner's allocable share of W-2 wages of the partnership. 
The partner's allocable share of W-2 wages is required to be 
determined in the same manner as the partner's share of wage 
expenses. For example, if a partner is allocated a deductible 
amount of 10 percent of wages paid by the partnership to 
employees for the taxable year, the partner is required to be 
allocated 10 percent of the W-2 wages of the partnership for 
purposes of calculating the wage limit under this deduction. 
Similarly, each shareholder of an S corporation takes into 
account the shareholder's pro rata share of each qualified item 
of income, gain, deduction, and loss, and is treated as having 
W-2 wages for the taxable year equal to the shareholder's pro 
rata share of W-2 wages of the S corporation.
      Qualified business income is determined without regard to 
any adjustments prescribed under the rules of the alternative 
minimum tax.
      The provision does not apply to a trust or estate.
      The deduction under the provision is allowed only for 
Federal income tax purposes.
      For purposes of determining a substantial underpayment of 
income tax under the accuracy related penalty,\61\ a 
substantial underpayment exists if the amount of the 
understatement exceeds the greater of five percent (not 10 
percent) of the tax required to be shown on the return or 
$5,000.
---------------------------------------------------------------------------
    \61\Sec. 6662(d)(1)(A).
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      Authority is provided to promulgate regulations needed to 
carry out the purposes of the provision, including regulations 
requiring, or restricting, the allocation of items of income, 
gain, loss, or deduction, or of wages under the provision. In 
addition, regulatory authority is provided to address reporting 
requirements appropriate under the provision, and the 
application of the provision in the case of tiered entities.
      The provision does not apply to taxable years beginning 
after December 31, 2025.
Additional examples
      The following examples provide a comprehensive 
illustration of the provision.
            Example 1
      H and W file a joint return on which they report taxable 
income of $520,000 (determined without regard to this 
provision). H is a partner in a qualified trade or business 
that is not a specified service business (``qualified business 
A''). W has a sole proprietorship qualified trade or business 
that is a specified service business (``qualified business 
B''). H and W also received $10,000 in qualified REIT dividends 
during the tax year.
      H's allocable share of qualified business income from 
qualified business A is $300,000, such that 23 percent of the 
qualified business income with respect to the business is 
$69,000.\62\ H's allocable share of wages paid by qualified 
business A is $100,000, such that 50 percent of the W-2 wages 
with respect to the business is $50,000.\63\ As H and W's 
taxable income is above the threshold amount for a joint 
return, the application of the wage limit for qualified 
business A is phased in. Accordingly, the $69,000 amount is 
reduced by 20 percent\64\ of the difference between $69,000 and 
$50,000, or $3,800.\65\ H's deductible amount for qualified 
business A is $65,200.\66\
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    \62\$300,000*.23 = $69,000.
    \63\$100,000*.5 = $50,000.
    \64\($520,000-$500,000)/$100,000 = 20 percent.
    \65\($69,000-$50,000)*.2 = $3,800.
    \66\$69,000-$3,800 = $65,200.
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      W's qualified business income and W-2 wages from 
qualified business B, which is a specified service business, 
are $325,000 and $150,000, respectively. H and W's taxable 
income is above the threshold amount for a joint return. Thus, 
the exclusion of qualified business income and W-2 wages from 
the specified service business are phased in. W has an 
applicable percentage of 80 percent.\67\ In determining 
includible qualified business income, W takes into account 80 
percent of $325,000, or $260,000. In determining includible W-2 
wages, W takes into account 80 percent of $150,000, or 
$120,000. W calculates the deductible amount for qualified 
business B by taking the lesser of 23 percent of $260,000 
($59,800) or 50 percent of includible W-2 wages of $120,000 
($60,000).\68\ W's deductible amount for qualified business B 
is $59,800.
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    \67\1-($520,000-$500,000)/$100,000 = 1-$20,000/$100,000 = 1-.2 = 80 
percent.
    \68\Although H and W's taxable income is above the threshold amount 
for a joint return, the wage limit is not binding as the 23 percent of 
includible qualified business income of qualified business B ($59,800) 
is less than 50 percent of includible W-2 wages of qualified business B 
($60,000).
---------------------------------------------------------------------------
      H and W's combined qualified business income amount of 
$127,300 is comprised of the deductible amount for qualified 
business A of $65,200, the deductible amount for qualified 
business B of $59,800, and 23 percent of the $10,000 qualified 
REIT dividends ($2,300). H and W's deduction is limited to 23 
percent of their taxable income for the year ($520,000), or 
$119,600. Accordingly, H and W's deduction for the taxable year 
is $119,600.
            Example 2
      H and W file a joint return on which they report taxable 
income of $200,000 (determined without regard to this 
provision). H has a sole proprietorship qualified trade or 
business that is not a specified service business (``qualified 
business A''). W is a partner in a qualified trade or business 
that is not a specified service business (``qualified business 
B''). H and W have a carryover qualified business loss of 
$50,000.
      H's qualified business income from qualified business A 
is $150,000, such that 23 percent of the qualified business 
income with respect to the business is $34,500. As H and W's 
taxable income is below the threshold amount for a joint 
return, the wage limit does not apply to qualified business A. 
H's deductible amount for qualified business A is $34,500.
      W's allocable share of qualified business loss is 
$40,000, such that 23 percent of the qualified business loss 
with respect to the business is $9,200. As H and W's taxable 
income is below the threshold amount for a joint return, the 
wage limit does not apply to qualified business B. W's 
deductible amount for qualified business B is a reduction to 
the deduction of $9,200.
      H and W's combined qualified business income amount of 
$13,800 is comprised of the deductible amount for qualified 
business A of $34,500, the reduction to the deduction for 
qualified business B of $9,200, and the reduction to the 
deduction of $11,500 attributable to the carryover qualified 
business loss. H and W's deduction is limited to 23 percent of 
their taxable income for the year ($200,000), or $46,000. 
Accordingly, H and W's deduction for the taxable year is 
$13,800.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with modifications.
Deduction percentage
      Under the conference agreement, the percentage of the 
deduction allowable under the provision is 20 percent (not 23 
percent).
Threshold amount
      The conference agreement reduces the threshold amount 
above which both the limitation on specified service businesses 
and the wage limit are phased in. Under the conference 
agreement, the threshold amount is $157,500 (twice that amount 
or $315,000 in the case of a joint return), indexed. The 
conferees expect that the reduced threshold amount will serve 
to deter high-income taxpayers from attempting to convert wages 
or other compensation for personal services to income eligible 
for the 20-percent deduction under the provision.
      The conference agreement provides that the range over 
which the phase-in of these limitations applies is $50,000 
($100,000 in the case of a joint return).
Limitation based on W-2 wages and capital
      The conference agreement modifies the wage limit 
applicable to taxpayers with taxable income above the threshold 
amount to provide a limit based either on wages paid or on 
wages paid plus a capital element. Under the conference 
agreement, the limitation is the greater of (a) 50 percent of 
the W-2 wages paid with respect to the qualified trade or 
business, or (b) the sum of 25 of percent of the W-2 wages with 
respect to the qualified trade or business plus 2.5 percent of 
the unadjusted basis, immediately after acquisition, of all 
qualified property.
      For purposes of the provision, qualified property means 
tangible property of a character subject to depreciation that 
is held by, and available for use in, the qualified trade or 
business at the close of the taxable year, and which is used in 
the production of qualified business income, and for which the 
depreciable period has not ended before the close of the 
taxable year. The depreciable period with respect to qualified 
property of a taxpayer means the period beginning on the date 
the property is first placed in service by the taxpayer and 
ending on the later of (a) the date 10 years after that date, 
or (b) the last day of the last full year in the applicable 
recovery period that would apply to the property under section 
168 (without regard to section 168(g)).
      For example, a taxpayer (who is subject to the limit) 
does business as a sole proprietorship conducting a widget-
making business. The business buys a widget-making machine for 
$100,000 and places it in service in 2020. The business has no 
employees in 2020. The limitation in 2020 is the greater of (a) 
50 percent of W-2 wages, or $0, or (b) the sum of 25 percent of 
W-2 wages ($0) plus 2.5 percent of the unadjusted basis of the 
machine immediately after its acquisition: $100,000  
.025 = $2,500. The amount of the limitation on the taxpayer's 
deduction is $2,500.
      In the case of property that is sold, for example, the 
property is no longer available for use in the trade or 
business and is not taken into account in determining the 
limitation. The Secretary is required to provide rules for 
applying the limitation in cases of a short taxable year of 
where the taxpayer acquires, or disposes of, the major portion 
of a trade or business or the major portion of a separate unit 
of a trade or business during the year. The Secretary is 
required to provide guidance applying rules similar to the 
rules of section 179(d)(2) to address acquisitions of property 
from a related party, as well as in a sale-leaseback or other 
transaction as needed to carry out the purposes of the 
provision and to provide anti-abuse rules, including under the 
limitation based on W-2 wages and capital. Similarly, the 
Secretary shall provide guidance prescribing rules for 
determining the unadjusted basis immediately after acquisition 
of qualified property acquired in like-kind exchanges or 
involuntary conversions as needed to carry out the purposes of 
the provision and to provide anti-abuse rules, including under 
the limitation based on W-2 wages and capital.
Specified service trade or business
      The conference agreement modifies the definition of a 
specified service trade or business in several respects. The 
definition is modified to exclude engineering and architecture 
services, and to take into account the reputation or skill of 
owners.
      A specified service trade or business means any trade or 
business involving the performance of services in the fields of 
health, law, consulting, athletics, financial services, 
brokerage services, or any trade or business where the 
principal asset of such trade or business is the reputation or 
skill of one or more of its employees or owners, or which 
involves the performance of services that consist of investing 
and investment management trading, or dealing in securities, 
partnership interests, or commodities. For this purpose a 
security and a commodity have the meanings provided in the 
rules for the mark-to-market accounting method for dealers in 
securities (sections 475(c)(2) and 475(e)(2), respectively).
Determination of the taxpayer's deduction
      The taxpayer's deduction for qualified business income 
for the taxable year is equal to the sum of (a) the lesser of 
the combined qualified business income amount for the taxable 
year or an amount equal to 20 percent of the excess of 
taxpayer's taxable income over any net capital gain\69\ and 
qualified cooperative dividends, plus (b) the lesser of 20 
percent of qualified cooperative dividends and taxable income 
(reduced by net capital gain). This sum may not exceed the 
taxpayer's taxable income for the taxable year (reduced by net 
capital gain). Under the provision, the 20-percent deduction 
with respect to qualified cooperative dividends is limited to 
taxable income (reduced by net capital gain) for the year. The 
combined qualified business income amount for the taxable year 
is the sum of the deductible amounts determined for each 
qualified trade or business carried on by the taxpayer and 20 
percent of the taxpayer's qualified REIT dividends and 
qualified publicly traded partnership income. The deductible 
amount for each qualified trade or business is the lesser of 
(a) 20 percent of the taxpayer's qualified business income with 
respect to the trade or business, or (b) the greater of 50 
percent of the W-2 wages with respect to the trade or business 
or the sum of 25 percent of the W-2 wages with respect to the 
trade or business and 2.5 percent of the unadjusted basis, 
immediately after acquisition, of all qualified property.
---------------------------------------------------------------------------
    \69\Defined in sec. 1(h).
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Deduction against taxable income
      The conference agreement clarifies that the 20-percent 
deduction is not allowed in computing adjusted gross income, 
and instead is allowed as a deduction reducing taxable income. 
Thus, for example, the provision does not affect limitations 
based on adjusted gross income. Similarly the conference 
agreement clarifies that the deduction is available to both 
non-itemizers and itemizers.
Treatment of agricultural and horticultural cooperatives
      For taxable years beginning after December 31, 2017 but 
not after December 31, 2025, a deduction is allowed to any 
specified agricultural or horticultural cooperative equal to 
the lesser of (a) 20 percent of the cooperative's taxable 
income for the taxable year or (b) the greater of 50 percent of 
the W-2 wages paid by the cooperative with respect to its trade 
or business or the sum of 25 percent of the W-2 wages of the 
cooperative with respect to its trade or business plus 2.5 
percent of the unadjusted basis immediately after acquisition 
of qualified property of the cooperative. A specified 
agricultural or horticultural cooperative is a organization to 
which subchapter T applies that is engaged in (a) the 
manufacturing, production, growth, or extraction in whole or 
significant part of any agricultural or horticultural product, 
(b) the marketing of agricultural or horticultural products 
that its patrons have so manufactured, produced, grown, or 
extracted, or (c) the provision of supplies, equipment, or 
services to farmers or organizations described in the 
foregoing.
Treatment of trusts and estates
      The conference agreement provides that trusts and estates 
are eligible for the 20-percent deduction under the provision. 
Rules similar to the rules under present-law section 199 (as in 
effect on December 1, 2017) apply for apportioning between 
fiduciaries and beneficiaries any W-2 wages and unadjusted 
basis of qualified property under the limitation based on W-2 
wages and capital.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

   C. Simplification and Reform of Family and Individual Tax Credits

1. Enhancement of child tax credit and new family credit (sec. 1101 of 
        the House bill, sec. 11022 of the Senate amendment, and sec. 24 
        of the Code)

                              PRESENT LAW

      An individual may claim a tax credit for each qualifying 
child under the age of 17. The amount of the credit per child 
is $1,000. A child who is not a citizen, national, or resident 
of the United States cannot be a qualifying child.
      The aggregate amount of child credits that may be claimed 
is phased out for individuals with income over certain 
threshold amounts. Specifically, the otherwise allowable child 
tax credit is reduced by $50 for each $1,000 (or fraction 
thereof) of modified adjusted gross income (``AGI'') over 
$75,000 for single individuals or heads of households, $110,000 
for married individuals filing joint returns, and $55,000 for 
married individuals filing separate returns. For purposes of 
this limitation, modified AGI includes certain otherwise 
excludable income earned by U.S. citizens or residents living 
abroad or in certain U.S. territories.
      The credit is allowable against both the regular tax and 
the alternative minimum tax (``AMT''). To the extent the child 
credit exceeds the taxpayer's tax liability, the taxpayer is 
eligible for a refundable credit\70\ (the ``additional child 
tax credit'') equal to 15 percent of earned income in excess of 
$3,000 (the ``earned income'' formula).
---------------------------------------------------------------------------
    \70\The refundable credit may not exceed the maximum credit per 
child of $1,000.
---------------------------------------------------------------------------
      Families with three or more children may determine the 
additional child tax credit using the ``alternative formula,'' 
if this results in a larger credit than determined under the 
earned income formula. Under the alternative formula, the 
additional child tax credit equals the amount by which the 
taxpayer's Social Security taxes exceed the taxpayer's earned 
income credit (``EIC'').
      Earned income is defined as the sum of wages, salaries, 
tips, and other taxable employee compensation plus net self-
employment earnings. At the taxpayer's election, combat pay may 
be treated as earned income for these purposes. Unlike the EIC, 
which also includes the preceding items in its definition of 
earned income, the additional child tax credit is based only on 
earned income to the extent it is included in computing taxable 
income. For example, some ministers' parsonage allowances are 
considered self-employment income, and thus are considered 
earned income for purposes of computing the EIC, but the 
allowances are excluded from gross income for individual income 
tax purposes, and thus are not considered earned income for 
purposes of the additional child tax credit since the income is 
not included in taxable income.
      Any credit or refund allowed or made to an individual 
under this provision (including to any resident of a U.S. 
possession) is not taken into account as income and is not be 
taken into account as resources for the month of receipt and 
the following two months for purposes of determining 
eligibility of such individual or any other individual for 
benefits or assistance, or the amount or extent of benefits or 
assistance, under any Federal program or under any State or 
local program financed in whole or in part with Federal funds.

                               HOUSE BILL

      The provision expands the child tax credit into a new 
family tax credit. The family credit consists of a $1,600 
credit per qualifying child under the age of 17, and a $300 
credit for each of the taxpayer (both spouses in the case of 
married taxpayers filing a joint return) and each dependent of 
the taxpayer who is not a qualifying child under age 17.
      The provision generally retains the present-law 
definition of dependent. However, under the provision, a 
qualifying child is eligible for the $1,600 credit only if such 
child is a citizen or national of the United States.
      The family credit phases out at AGI of $230,000 for 
married taxpayers filing joint returns and $115,000 for other 
individuals. The credit is refundable under rules similar to 
the present law additional child tax credit. That is, to the 
extent the credit exceeds the taxpayer's tax liability, the 
taxpayer is eligible for a refundable credit equal to 15 
percent of earned income in excess of $3,000.\71\ The 
refundable credit is limited to $1,000 times the number of 
qualifying children under the age of 17 claimed on the return. 
This $1,000 per child dollar limitation is indexed for 
inflation, with a base year of 2017, rounding up to the nearest 
$100. Accordingly, in 2018 the limitation will be $1,100.
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    \71\The alternate formula described in the present law section 
applies to the refundable portion of the family credit as well.
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      The provision requires that the taxpayer include the name 
and taxpayer identification number of each qualifying child and 
dependent on the tax return for each taxable year.\72\
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    \72\See a description of sec. 1103 of the House bill for 
modifications to the taxpayer identification number requirement.
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      The $300 credit for the taxpayer, spouse, and non-child 
dependents of the taxpayer expires for taxable years beginning 
after December 31, 2022.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The provision temporarily increases the child tax credit 
to $2,000 per qualifying child. Additionally, the age limit for 
a qualifying child is temporarily increased by one year, such 
that a taxpayer may claim the credit with respect to any 
qualifying child under the age of 18. This increase in the age 
limit expires for taxable years after December 31, 2024.
      The credit is further modified to temporarily provide for 
a $500 nonrefundable credit for qualifying dependents other 
than qualifying children. The provision generally retains the 
present-law definition of dependent.
      Under the temporary provision, beginning in 2018, the 
threshold at which the credit begins to phase out is increased 
to $500,000 for all taxpayers. These amounts are not indexed 
for inflation.
      The provision temporarily lowers the earned income 
threshold for the refundable child tax credit to $2,500. As 
under present law, the maximum amount refundable may not exceed 
$1,000 per qualifying child. Under the provision, this $1,000 
threshold is indexed for inflation with a base year of 2017, 
rounding up to the nearest $100 (such that the threshold is 
$1,100 in 2018). A temporary rule provides that, for the 
taxable years for which the above-described changes are in 
effect, in order to receive the refundable portion of the child 
tax credit, a taxpayer must include a Social Security number 
for each qualifying child for whom the credit is claimed on the 
tax return.
      The temporary provision (other than the increase in the 
age limit, which expires one year earlier) expires for taxable 
years beginning after December 31, 2025.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement temporarily increases the child 
tax credit to $2,000 per qualifying child. The credit is 
further modified to temporarily provide for a $500 
nonrefundable credit for qualifying dependents other than 
qualifying children. The provision generally retains the 
present-law definition of dependent.
      Under the conference agreement, the maximum amount 
refundable may not exceed $1,400 per qualifying child.\73\ 
Additionally, the conference agreement provides that, in order 
to receive the child tax credit (i.e., both the refundable and 
non-refundable portion), a taxpayer must include a Social 
Security number for each qualifying child for whom the credit 
is claimed on the tax return. For these purposes, a Social 
Security number must be issued before the due date for the 
filing of the return for the taxable year. This requirement 
does not apply to a non-child dependent for whom the $500 non-
refundable credit is claimed.\74\
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    \73\Unlike both the House bill and the Senate amendment, the 
conference agreement uses an indexing convention that rounds the $1,400 
amount to the next lowest multiple of $100.
    \74\Additionally, a qualifying child who is ineligible to receive 
the child tax credit because that child did not have a Social Security 
number as the child's taxpayer identification number may nonetheless 
qualify for the non-refundable $500 credit.
---------------------------------------------------------------------------
      Further, the conference agreement retains the present-law 
age limit for a qualifying child. Thus, a qualifying child is 
an individual who has not attained age 17 during the taxable 
year.
      Finally, the conference agreement modifies the adjusted 
gross income phaseout thresholds. Under the conference 
agreement, the credit begins to phase out for taxpayers with 
adjusted gross income in excess of $400,000 (in the case of 
married taxpayers filing a joint return) and $200,000 (for all 
other taxpayers). These phaseout thresholds are not indexed for 
inflation.
      As was the case with the Senate amendment, the provision 
expires for taxable years beginning after December 31, 2025.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.
2. Credit for the elderly and permanently disabled (sec. 1102(a) of the 
        House bill and sec. 22 of the Code)

                              PRESENT LAW

      Certain taxpayers who are over the age of 65 or retired 
on account of permanent and total disability may claim a 
nonrefundable credit. The maximum credit is 15 percent of 
$5,000 for a return where one individual qualifies and $7,500 
on a joint return where both spouses qualify.\75\ Thus, the 
maximum credit amounts are $750 and $1,125, respectively.
---------------------------------------------------------------------------
    \75\Sec. 22(a).
---------------------------------------------------------------------------
      The credit base is reduced by one half of the amount by 
which the taxpayer's adjusted gross income exceeds $7,500 if 
the taxpayer is unmarried, $10,000 if the taxpayer is married 
and files a joint return, or $5,000 if the taxpayer is married 
and files a separate return.\76\ Thus, the credit base is 
phased down to zero when adjusted gross income exceeds $17,500 
for an unmarried person, $20,000 for a married couple filing a 
joint return where only one spouse qualifies for the credit, 
$25,000 for a joint return where both spouses qualify, and 
$12,500 for a married person filing a separate return.
---------------------------------------------------------------------------
    \76\Sec. 22(d).
---------------------------------------------------------------------------
      Additionally, the credit base is reduced by certain items 
of income otherwise exempt from tax: (1) benefits under Title 
II of the Social Security Act; (2) retirement benefits under 
the Railroad Retirement Act of 1974; (3) disability benefits 
paid by the Veterans Administration, except for benefits 
payable on account of personal injuries or sickness resulting 
from active service in the Armed Forces; and (4) pensions, 
annuities, and disability benefits exempted from tax by any 
provision not in the Code.\77\
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    \77\Sec. 22(c)(3).
---------------------------------------------------------------------------
      To qualify for the credit, a taxpayer must, at the end of 
the taxable year, be at least 65 years old or retired on 
account of permanent and total disability.\78\ Permanent and 
total disability exists if, at the time of retirement, the 
taxpayer was ``unable to engage in any substantial gainful 
activity by reason of any medically determinable physical or 
mental impairment which can be expected to result in death or 
which has lasted or can be expected to last for a continuous 
period of not less than 12 months.\79\
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    \78\Sec. 22(b).
    \79\Sec. 22(e)(3).
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                               HOUSE BILL

      The House bill repeals the credit for the elderly and 
permanently disabled.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
3. Repeal of credit for plug-in electric drive motor vehicles (sec. 
        1102(c) of the House bill and sec. 30D of the Code)

                              PRESENT LAW

      A credit is available for new four-wheeled vehicles 
(excluding low speed vehicles and vehicles weighing 14,000 
pounds or more) propelled by a battery with at least 4 
kilowatt-hours of electricity that can be charged from an 
external source.\80\ The base credit is $2,500 plus $417 for 
each kilowatt-hour of additional battery capacity in excess of 
4 kilowatt-hours (for a maximum credit of $7,500). Qualified 
vehicles are subject to a 200,000 vehicle-per-manufacturer 
limitation. Once the limitation has been reached the credit is 
phased down over four calendar quarters.
---------------------------------------------------------------------------
    \80\Sec. 30D.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision repeals the credit for plug-in electric 
drive motor vehicles.
      Effective date.--The provision is effective for vehicles 
placed in service in taxable years beginning after December 31, 
2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
4. Termination of credit for interest on certain home mortgages (sec. 
        1102(b) of the House bill and sec. 25 of the Code)

                              PRESENT LAW

      Qualified governmental units can elect to exchange all or 
a portion of their qualified mortgage bond authority for 
authority to issue mortgage credit certificates (``MCCs'').\81\ 
MCCs entitle homebuyers to a nonrefundable income tax credit 
for a specified percentage of interest paid on mortgage loans 
on their principal residences. The tax credit provided by the 
MCC may be carried forward three years. Once issued, an MCC 
generally remains in effect as long as the residence being 
financed is the certificate-recipient's principal residence. 
MCCs generally are subject to the same eligibility and targeted 
area requirements as qualified mortgage bonds.\82\
---------------------------------------------------------------------------
    \81\Sec. 25.
    \82\Sec. 143.
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                               HOUSE BILL

      No credit is allowed with respect to any MCC issued after 
December 31, 2017.
      Effective date.--The provision applies to taxable years 
ending after December 31, 2017. Credits continue for interest 
paid on mortgage loans on principal residences for which MCCs 
have been issued on or before December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the House bill 
provision.
5. Modification of taxpayer identification number requirements for the 
        child tax credit, earned income credit, and American 
        Opportunity credit (sec. 1103 of the House bill, sec. 11022 of 
        the Senate amendment and secs. 24, 25A and 32 of the Code)

                              PRESENT LAW

Earned income credit
      Low and moderate-income taxpayers may be eligible for the 
refundable earned income credit (``EIC''). Eligibility for the 
EIC is based on the taxpayer's earned income, adjusted gross 
income, investment income, filing status, and work status in 
the United States. The amount of the EIC is based on the 
presence and number of qualifying children in the worker's 
family, as well as on adjusted gross income and earned income.
      The earned income credit generally equals a specified 
percentage of earned income\83\ up to a maximum dollar amount. 
The maximum amount applies over a certain income range and then 
diminishes to zero over a specified phase-out range. For 
taxpayers with earned income (or adjusted gross income 
(``AGI''), if greater) in excess of the beginning of the phase-
out range, the maximum EIC amount is reduced by the phase-out 
rate multiplied by the amount of earned income (or AGI, if 
greater) in excess of the beginning of the phase-out range. For 
taxpayers with earned income (or AGI, if greater) in excess of 
the end of the phase-out range, no credit is allowed.
---------------------------------------------------------------------------
    \83\Earned income is defined as (1) wages, salaries, tips, and 
other employee compensation, but only if such amounts are includible in 
gross income, plus (2) the amount of the individual's net self-
employment earnings.
---------------------------------------------------------------------------
      An individual is not eligible for the EIC if the 
aggregate amount of disqualified income of the taxpayer for the 
taxable year exceeds $3,450 (for 2017). This threshold is 
indexed for inflation. Disqualified income is the sum of: (1) 
interest (taxable and tax-exempt); (2) dividends; (3) net rent 
and royalty income (if greater than zero); (4) capital gains 
net income; and (5) net passive income (if greater than zero) 
that is not self-employment income.
      The EIC is a refundable credit, meaning that if the 
amount of the credit exceeds the taxpayer's Federal income tax 
liability, the excess is payable to the taxpayer as a direct 
transfer payment.
Child tax credit\84\
      An individual may claim a tax credit of $1,000 for each 
qualifying child under the age of 17. A child who is not a 
citizen, national, or resident of the United States cannot be a 
qualifying child.
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    \84\See description of sec. 1101 of the House bill for the House 
bill and Senate amendment modifications to the child tax credit.
---------------------------------------------------------------------------
      The aggregate amount of allowable child credits is phased 
out for individuals with income over certain threshold amounts. 
Specifically, the otherwise allowable aggregate child tax 
credit (``CTC'') amount is reduced by $50 for each $1,000 (or 
fraction thereof) of modified adjusted gross income (``modified 
AGI'') over $75,000 for single individuals or heads of 
households, $110,000 for married individuals filing joint 
returns, and $55,000 for married individuals filing separate 
returns. For purposes of this limitation, modified AGI includes 
certain otherwise excludable income\85\ earned by U.S. citizens 
or residents living abroad or in certain U.S. territories.
---------------------------------------------------------------------------
    \85\Sec. 911.
---------------------------------------------------------------------------
      The child tax credit is allowable against both the 
regular tax and the alternative minimum tax (``AMT''). To the 
extent the credit exceeds the taxpayer's tax liability, the 
taxpayer is eligible for a refundable credit (the ``additional 
child tax credit'') equal to 15 percent of earned income in 
excess of a threshold dollar amount of $3,000 (the ``earned 
income'' formula).
      Families with three or more qualifying children may 
determine the additional child tax credit using the 
``alternative formula'' if this results in a larger credit than 
determined under the earned income formula. Under the 
alternative formula, the additional child tax credit equals the 
amount by which the taxpayer's Social Security taxes exceed the 
taxpayer's EIC.
      As with the EIC, earned income is defined as the sum of 
wages, salaries, tips, and other taxable employee compensation 
plus net self-employment earnings. Unlike the EIC, the 
additional child tax credit is based on earned income only to 
the extent it is included in computing taxable income. For 
example, some ministers' parsonage allowances are considered 
self-employment income and thus are considered earned income 
for purposes of computing the EIC, but the allowances are 
excluded from gross income for individual income tax purposes 
and thus are not considered earned income for purposes of the 
additional child tax credit.
American Opportunity credit\86\
      The American Opportunity credit provides individuals with 
a tax credit of up to $2,500 per eligible student per year for 
qualified tuition and related expenses (including course 
materials) paid for each of the first four years of the 
student's post-secondary education in a degree or certificate 
program. The credit rate is 100 percent on the first $2,000 of 
qualified tuition and related expenses, and 25 percent on the 
next $2,000 of qualified tuition and related expenses.
---------------------------------------------------------------------------
    \86\See description of sec. 1201 of the House bill for the bill's 
modifications to the American Opportunity credit.
---------------------------------------------------------------------------
      The American Opportunity credit is phased out ratably for 
taxpayers with modified AGI between $80,000 and $90,000 
($160,000 and $180,000 for married taxpayers filing a joint 
return). The credit may be claimed against a taxpayer's AMT 
liability.
      Forty percent of a taxpayer's otherwise allowable 
modified credit is refundable. A refundable credit is a credit 
which, if the amount of the credit exceeds the taxpayer's 
Federal income tax liability, the excess is payable to the 
taxpayer as a direct transfer payment.
      No credit is allowed to a taxpayer who fails to include 
the taxpayer identification number of the student to whom the 
qualified tuition and related expenses relate.
Taxpayer identification number requirements
      Any individual filing a U.S. tax return is required to 
state his or her taxpayer identification number on such return. 
Generally, a taxpayer identification number is the individual's 
Social Security number (``SSN'').\87\ However, in the case of 
an individual who is not eligible to be issued an SSN, but who 
has a tax filing obligation, the Internal Revenue Service 
(``IRS'') issues an individual taxpayer identification number 
(``ITIN'') for use in connection with the individual's tax 
filing requirements.\88\ An individual who is eligible to 
receive an SSN may not obtain an ITIN for purposes of his or 
her tax filing obligations.\89\ An ITIN does not provide 
eligibility to work in the United States or claim Social 
Security benefits.
---------------------------------------------------------------------------
    \87\Sec. 6109(a).
    \88\Treas. Reg. Sec. 301.6109-1(d)(3)(i).
    \89\Treas. Reg. Sec. 301.6109-1(d)(3)(ii).
---------------------------------------------------------------------------
      Examples of individuals who are not eligible for SSNs, 
but potentially need ITINs in order to file U.S. returns 
include a nonresident alien filing a claim for a reduced 
withholding rate under a U.S. income tax treaty, a nonresident 
alien required to file a U.S. tax return,\90\ an individual who 
is a U.S. resident alien under the substantial presence test 
and who therefore must file a U.S. tax return,\91\ a dependent 
or spouse of the prior two categories of individuals, or a 
dependent or spouse of a nonresident alien visa holder.
---------------------------------------------------------------------------
    \90\For instance, in the case of an individual that has income 
which is effectively connected with a United States trade or business, 
such as the performance of personal services in the United States.
    \91\Such an individual would have a filing requirement without 
regard to whether the individual is lawfully present or has work 
authorization.
---------------------------------------------------------------------------
      An individual is ineligible for the EIC (but not the 
child tax credit) if he or she does not include a valid SSN and 
the qualifying child's valid SSN (and, if married, the spouse's 
SSN) on his or her tax return. For these purposes, the Code 
defines an SSN as a Social Security number issued to an 
individual, other than an SSN issued to an individual solely 
for the purpose of applying for or receiving federally funded 
benefits.\92\ If an individual fails to provide a correct 
taxpayer identification number, such omission will be treated 
as a mathematical or clerical error by the IRS.
---------------------------------------------------------------------------
    \92\Sec. 205(c)(2)(B)(i)(II) (and that portion of sec. 
205(c)(2)(B)(i)(III) relating to it) of the Social Security Act.
---------------------------------------------------------------------------
      A taxpayer who resides with a qualifying child may not 
claim the EIC with respect to the qualifying child if such 
child does not have a valid SSN. The taxpayer also is 
ineligible for the EIC for workers without children because he 
or she resides with a qualifying child. However, if a taxpayer 
has two or more qualifying children, some of whom do not have a 
valid SSN, the taxpayer may claim the EIC based on the number 
of qualifying children for whom there are valid SSNs.

                               HOUSE BILL

      Under the provision, any qualifying child claimed by the 
taxpayer on the tax return must use, as that child's 
identifying number, a Social Security number that is valid for 
employment in the United States in order to be eligible for the 
CTC. Under the provision, if a child's identifying number was 
other than a Social Security number (such as an ITIN), the 
taxpayer would be eligible to receive the $300 credit for 
dependents other than qualifying children, assuming such child 
otherwise qualified as a dependent of the taxpayer.\93\
---------------------------------------------------------------------------
    \93\See description of sec. 1101 of the House bill.
---------------------------------------------------------------------------
      Additionally, under the provision, taxpayers who use as 
their taxpayer identification number a Social Security number 
issued for non-work reasons, such as for purposes of receiving 
Federal benefits or for any other reason, are not eligible for 
the EIC.
      Lastly, under the provision, in order to claim the 
American Opportunity credit, the identification number provided 
with respect to the student to whom the tuition and related 
expenses relate must be a Social Security number.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      Under the Senate amendment, as a part of the temporary 
modifications to the child tax credit, for the taxable years 
2018 through 2025, in order to receive the refundable portion 
of the child tax credit, a taxpayer must include a Social 
Security number for each qualifying child for whom the credit 
is claimed on the tax return.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the House bill 
provision.\94\
---------------------------------------------------------------------------
    \94\But see description of sec. 11022 of the conference agreement 
for a description of modifications with respect to the taxpayer 
identification number requirements pertaining to the child tax credit.
---------------------------------------------------------------------------
6. Procedures to reduce improper claims of earned income credit (sec. 
        1104 of the House bill and new secs. 32(c)(2)(B)(vii) and 
        6011(i) of the Code)

                              PRESENT LAW

Earned income credit
      Low- and moderate-income workers may be eligible for the 
refundable earned income credit (``EIC''). Eligibility for the 
EIC is based on earned income, adjusted gross income (``AGI''), 
investment income, filing status, number of children, and 
immigration and work status in the United States. The maximum 
amount of the EIC applies over a certain income range and then 
diminishes to zero over a specified phaseout range. The EIC is 
a refundable credit, meaning that if the amount of the credit 
exceeds the taxpayer's Federal income tax liability, the excess 
is payable to the taxpayer as a direct transfer payment.
      The EIC generally equals a specified percentage of earned 
income up to a maximum dollar amount. Earned income is the sum 
of employee compensation includible in gross income (generally 
the amount reported in Box 1 of Form W-2, Wage and Tax 
Statement, discussed below) plus net earnings from self-
employment determined with regard to the deduction for one-half 
of self-employment taxes.\95\ Special rules apply in computing 
earned income for purposes of the EIC.\96\ Net earnings from 
self-employment generally includes the gross income derived by 
an individual from any trade or business carried on by the 
individual, less the deductions attributable to the trade or 
business that are allowed under the self-employment tax rules, 
plus the individual's distributive share of income or loss from 
any trade or business of a partnership in which the individual 
is a partner.\97\
---------------------------------------------------------------------------
    \95\Sec. 32(c)(2)(A).
    \96\Sec. 32(c)(2)(B).
    \97\Sec. 1402(a); Chief Counsel Advice 200022051.
---------------------------------------------------------------------------
Employment taxes and quarterly reporting by employers
      Employment taxes include employer and employee taxes on 
employee wages under the Federal Insurance Contributions Act 
(``FICA'') and income taxes required to be withheld by 
employers from employee wages (``income tax withholding'').\98\ 
Income tax withholding rates vary depending on the amount of 
wages paid, the length of the payroll period, and the number of 
withholding allowances claimed by the employee. Employers are 
required also to withhold the employee share of FICA tax from 
employee wages. For these purposes, wages is defined broadly to 
include all remuneration, subject to exceptions specifically 
provided in the relevant statutory provisions.
---------------------------------------------------------------------------
    \98\Secs. 3101-3128 (FICA) and 3401-3404 (income tax withholding). 
Employment taxes also include taxes under the Railroad Retirement Act 
(``RRTA''), sections 3201-3241, and tax under the Federal Unemployment 
Taxes Act (``FUTA''), sections 3301-3311. Sections 3501-3510 provide 
additional employment tax rules.
---------------------------------------------------------------------------
      Employers generally submit quarterly reports to IRS on 
Form 941, Employer's Quarterly Federal Tax Return, showing the 
number of employees to whom wages were paid during the quarter, 
the total wages paid to employees, total FICA taxes (employer 
and employee) on the wages, and total income tax withheld from 
the wages.\99\ In addition, by January 31 after the end of a 
calendar year, an employer must provide each employee with Form 
W-2, Wage and Tax Statement, showing the total wages paid to 
the employee during the calendar year and certain other 
information.\100\ The information contained on each employee's 
W-2 is also provided to the IRS, accompanied by Form W-3, 
Transmittal of Wage and Tax Statements, showing the total 
number of Forms W-2 and aggregate information for all 
employees, such as aggregate wages reported on Forms W-2. IRS 
then compares the W-3 wage totals to the Form 941 (or Form 944) 
wage totals.
---------------------------------------------------------------------------
    \99\Treas. Secs. 31.6011(a)-1(a)(1), 31.6011(a)-4(a)(1), 
31.6011(a)-1(a)(5). If the total amount of FICA taxes and withheld 
income tax for a year is $1,000 or less, instead of filing Form 941 for 
each quarter, the employer is permitted to file annually on Form 944, 
Employer's Annual Federal Tax Return. Separate forms and filing 
requirement apply with respect to RRTA and FUTA taxes.
    \100\Sec. 6051(a). Employees are required to include a copy of Form 
W-2 when filing their income tax returns.
---------------------------------------------------------------------------

                               HOUSE BILL

Modification of the definition of ``earned income''
      The provision clarifies that a taxpayer is required to 
claim all allowable deductions in computing net earnings from 
self-employment for EIC purposes.
Quarterly reporting of wages by employers
      The provision modifies employer reporting requirements 
associated with the deduction and withholding of certain 
employment taxes on wages. Under the provision, employers must 
report, along with the aggregate wages paid and employment 
taxes collected on Form 941 or Form 944, the name and address 
of each employee and the amount of reportable wages received by 
each of those employees.
      Effective date.--Modification of the definition of 
``earned income.''
      The provision applies to taxable years ending after the 
date of enactment.
      Effective date.--Quarterly reporting of wages by 
employers.
      The provision applies to taxable years ending after the 
date of enactment, subject to the authority of the Secretary to 
delay for such period as the Secretary determines to be 
reasonable to allow adequate time to modify systems to permit 
compliance with the additional reporting requirements.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
7. Certain income disallowed for purposes of the earned income tax 
        credit (sec. 1105 of the House bill, new secs. 32(n) and 
        32(c)(2)(C) of the Code, and secs. 6051, 6052, 6041(a), and 
        6050(w) of the Code)

                              PRESENT LAW

            Earned income credit
      Low- and moderate-income workers may be eligible for the 
refundable earned income credit (``EIC''). Eligibility for the 
EIC is based on earned income, adjusted gross income (``AGI''), 
investment income, filing status, number of children, and 
immigration and work status in the United States. The maximum 
amount of the EIC applies over a certain income range and then 
diminishes to zero over a specified phaseout range. The EIC is 
a refundable credit, meaning that if the amount of the credit 
exceeds the taxpayer's Federal income tax liability, the excess 
is payable to the taxpayer as a direct transfer payment.
      The EIC generally equals a specified percentage of earned 
income up to a maximum dollar amount. Earned income is the sum 
of employee compensation includible in gross income plus net 
earnings from self-employment determined with regard to the 
deduction for one-half of self-employment taxes.\101\ Special 
rules apply in computing earned income for purposes of the 
EIC.\102\
---------------------------------------------------------------------------
    \101\Sec. 32(c)(2)(A).
    \102\Sec. 32(c)(2)(B).
---------------------------------------------------------------------------
            Information reporting
      Present law imposes a variety of information reporting 
requirements on participants in certain transactions.\103\ 
These requirements are intended to assist taxpayers in 
preparing their income tax returns and to help the Internal 
Revenue Service (``IRS'') determine whether such returns are 
correct and complete.
---------------------------------------------------------------------------
    \103\Sec. 6031 through 6060.
---------------------------------------------------------------------------
      The primary provision governing information reporting by 
payors requires an information return by every person engaged 
in a trade or business who makes payments aggregating $600 or 
more in any taxable year to a single payee in the course of the 
payor's trade or business.\104\ Payments to corporations 
generally are excepted from this requirement. Payments subject 
to reporting include fixed or determinable income or 
compensation, but do not include payments for goods or certain 
enumerated types of payments that are subject to other specific 
reporting requirements.\105\ Detailed rules are provided for 
the reporting of various types of investment income, including 
interest, dividends, and gross proceeds from brokered 
transactions (such as a sale of stock) paid to U.S. 
persons.\106\
---------------------------------------------------------------------------
    \104\The information return generally is submitted electronically 
as a Form-1099 or Form-1096, although certain payments to beneficiaries 
or employees may require use of Forms W-3 or W-2, respectively. Treas. 
Reg. sec. 1.6041-1(a)(2).
    \105\Sec. 6041(a) requires reporting as to fixed or determinable 
gains, profits, and income (other than payments to which section 
6042(a)(1), 6044(a)(1), 6047(c), 6049(a), or 6050N(a) applies and other 
than payments with respect to which a statement is required under 
authority of section 6042(a), 6044(a)(2) or 6045). These payments 
excepted from section 6041(a) include most interest, royalties, and 
dividends.
    \106\Secs. 6042 (dividends), 6045 (broker reporting) and 6049 
(interest) and the Treasury regulations thereunder.
---------------------------------------------------------------------------
      Special information reporting requirements exist for 
employers required to deduct and withhold tax from employees' 
income.\107\ In addition, any service recipient engaged in a 
trade or business and paying for services is required to make a 
return according to regulations when the aggregate of payments 
is $600 or more.\108\
---------------------------------------------------------------------------
    \107\Sec. 6051(a).
    \108\Sec. 6041A.
---------------------------------------------------------------------------
      There are also information reporting requirements for 
merchant acquiring entities and third party settlement 
organizations with respect to payments made in settlement of 
payment card transactions and third party payment network 
transactions occurring in that calendar year.\109\
---------------------------------------------------------------------------
    \109\Sec. 6050W.
---------------------------------------------------------------------------
      The payor of amounts described above is required to 
provide the recipient of the payment with an annual statement 
showing the aggregate payments made and contact information for 
the payor.\110\ The statement must be supplied to taxpayers by 
the payors by January 31 of the following calendar year.\7\ 
Payors generally must file the information return with the IRS 
on or before January 31 of the year following the calendar year 
to which such returns relate.\111\
---------------------------------------------------------------------------
    \110\Sec. 6041(d).
    \111\Sec. 6071(d).
---------------------------------------------------------------------------
      Failure to comply with the information reporting 
requirements results in penalties, which may include a penalty 
for failure to file the information return,\112\ to furnish 
payee statements,\113\ or to comply with other various 
reporting requirements.\114\ No penalty is imposed if the 
failure is due to reasonable cause.\115\ Any person who is 
required to file an information return, but who fails to do so 
on or before the prescribed filing date is subject to a penalty 
that varies based on when, if at all, the correct information 
return is filed and the correct payee statement is furnished.
---------------------------------------------------------------------------
    \112\Sec. 6721.
    \113\Sec. 6722.
    \114\Sec. 6723.
    \115\Sec. 6724.
---------------------------------------------------------------------------
            Books or records
      Every person liable for any tax imposed by the Code, or 
for the collection thereof, must keep such records, render such 
statements, make such returns, and comply with such rules and 
regulations as the Secretary may from time to time 
prescribe.\116\ Whenever necessary, the Secretary may require 
any person, by notice served upon that person or by 
regulations, to make such returns, render such statements, or 
keep such records, as the Secretary deems sufficient to show 
whether or not that person is liable for tax. Persons subject 
to income tax are required to keep books or records sufficient 
to establish the amount of gross income, deductions, credits, 
or other matters required to be shown by that person in any 
return of such tax or information.\117\ The books or records 
are required to be kept available at all times for inspection 
by the IRS, and must be retained so long as the contents 
thereof may become material in the administration of any 
internal revenue law.\118\
---------------------------------------------------------------------------
    \116\Sec. 6001.
    \117\Treas. sec. 1.6001-1(a).
    \118\Treas. sec. 1.6001-1(e).
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                               HOUSE BILL

      The provision limits earned income for purposes of the 
earned income credit to amounts substantiated by the taxpayer 
on statements furnished or returns filed under third party 
information reporting requirements, or amounts substantiated by 
the taxpayer's books and records. The authority of the IRS to 
make returns, render statements, or keep records and, pursuant 
to the Code, to make corresponding adjustments to income to 
reflect substantiated amounts for purposes other than the EIC 
remains unaffected by this provision.
      Effective date.--The provision is effective for taxable 
years ending after the date of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
8. Limitation on losses for taxpayers other than corporations (sec. 
        11012 of the Senate amendment and sec. 461(l) of the Code)

                              PRESENT LAW

Loss limitation rules applicable to individuals
            Passive loss rules
      The passive loss rules limit deductions and credits from 
passive trade or business activities.\119\ The passive loss 
rules apply to individuals, estates and trusts, and closely 
held corporations. A passive activity for this purpose is a 
trade or business activity in which the taxpayer owns an 
interest, but in which the taxpayer does not materially 
participate. A taxpayer is treated as materially participating 
in an activity only if the taxpayer is involved in the 
operation of the activity on a basis that is regular, 
continuous, and substantial.\120\ Deductions attributable to 
passive activities, to the extent they exceed income from 
passive activities, generally may not be deducted against other 
income. Deductions and credits that are suspended under these 
rules are carried forward and treated as deductions and credits 
from passive activities in the next year. The suspended losses 
from a passive activity are allowed in full when a taxpayer 
makes a taxable disposition of his entire interest in the 
passive activity to an unrelated person.
---------------------------------------------------------------------------
    \119\Sec. 469.
    \120\Regulations provide more detailed standards for material 
participation. See Treas. Reg. sec. 1.469-5 and -5T.
---------------------------------------------------------------------------
            Excess farm loss rules
      A limitation on excess farm losses applies to taxpayers 
other than C corporations.\121\ If a taxpayer other than a C 
corporation receives an applicable subsidy for the taxable 
year, the amount of the excess farm loss is not allowed for the 
taxable year, and is carried forward and treated as a deduction 
attributable to farming businesses in the next taxable year. An 
excess farm loss for a taxable year means the excess of 
aggregate deductions that are attributable to farming 
businesses over the sum of aggregate gross income or gain 
attributable to farming businesses plus the threshold amount. 
The threshold amount is the greater of (1) $300,000 ($150,000 
for married individuals filing separately), or (2) for the 
five-consecutive-year period preceding the taxable year, the 
excess of the aggregate gross income or gain attributable to 
the taxpayer's farming businesses over the aggregate deductions 
attributable to the taxpayer's farming businesses.
---------------------------------------------------------------------------
    \121\Sec. 461(j).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      For taxable years beginning after December 31, 2017 and 
before January 1, 2026, excess business losses of a taxpayer 
other than a corporation are not allowed for the taxable year. 
Such losses are carried forward and treated as part of the 
taxpayer's net operating loss (``NOL'') carryforward in 
subsequent taxable years. Under the bill, NOL carryovers 
generally are allowed for a taxable year up to the lesser of 
the carryover amount or 90 percent (80 percent for taxable 
years beginning after December 31, 2022) of taxable income 
determined without regard to the deduction for NOLs.
      An excess business loss for the taxable year is the 
excess of aggregate deductions of the taxpayer attributable to 
trades or businesses of the taxpayer (determined without regard 
to the limitation of the provision), over the sum of aggregate 
gross income or gain of the taxpayer plus a threshold amount. 
The threshold amount for a taxable year is $250,000 (or twice 
the otherwise applicable threshold amount in the case of a 
joint return). The threshold amount is indexed for inflation.
      In the case of a partnership or S corporation, the 
provision applies at the partner or shareholder level. Each 
partner's distributive share and each S corporation 
shareholder's pro rata share of items of income, gain, 
deduction, or loss of the partnership or S corporation are 
taken into account in applying the limitation under the 
provision for the taxable year of the partner or S corporation 
shareholder. Regulatory authority is provided to apply the 
provision to any other passthrough entity to the extent 
necessary to carry out the provision. Regulatory authority is 
also provided to require any additional reporting as the 
Secretary determines is appropriate to carry out the purposes 
of the provision.
      The provision applies after the application of the 
passive loss rules.\122\
---------------------------------------------------------------------------
    \122\Sec. 469.
---------------------------------------------------------------------------
      For taxable years beginning after December 31, 2017 and 
before January 1, 2026, the present-law limitation relating to 
excess farm losses does not apply.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment. 
Thus, excess business losses not allowed are carried forward 
and treated as part of the taxpayer's net operating loss 
(``NOL'') carryforward in subsequent taxable years as 
determined under the NOL rules provided under the conference 
agreement.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.
9. Reform of American opportunity tax credit and repeal of lifetime 
        learning credit (sec. 1201 of the House bill and sec. 25A of 
        the Code)

                              PRESENT LAW

American Opportunity credit
      The American Opportunity credit provides individuals with 
a tax credit of up to $2,500 per eligible student per year for 
qualified tuition and related expenses (including course 
materials) paid for each of the first four years of the 
student's post-secondary education in a degree or certificate 
program. The credit rate is 100 percent on the first $2,000 of 
qualified tuition and related expenses, and 25 percent on the 
next $2,000 of qualified tuition and related expenses. The 
credit may not be claimed for more than four taxable years with 
respect to any student.
      The American Opportunity credit is phased out ratably for 
taxpayers with modified AGI between $80,000 and $90,000 
($160,000 and $180,000 for married taxpayers filing a joint 
return). The credit may be claimed against a taxpayer's AMT 
liability.
      Forty percent of a taxpayer's otherwise allowable 
modified credit is refundable. A refundable credit is a credit 
which, if the amount of the credit exceeds the taxpayer's 
Federal income tax liability, the excess is payable to the 
taxpayer as a direct transfer payment.
      A taxpayer may not claim the American Opportunity credit 
if the qualified tuition and related expenses for the 
enrollment or attendance of a student, if such student has been 
convicted of a Federal or State felony offense consisting of 
the possession or distribution of a controlled substance before 
the end of the taxable year.\123\
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    \123\Sec. 25A(b)(2)(D).
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Lifetime learning credit
      Individual taxpayers may be eligible to claim a 
nonrefundable credit, the Lifetime Learning credit, against 
Federal income taxes equal to 20 percent of qualified tuition 
and related expenses incurred during the taxable year on behalf 
of the taxpayer, the taxpayer's spouse, or any dependents. Up 
to $10,000 of qualified tuition and related expenses per 
taxpayer return are eligible for the Lifetime Learning credit 
(i.e., the maximum credit per taxpayer return is $2,000).
      In contrast to the American Opportunity credit, a 
taxpayer may claim the Lifetime Learning credit for an 
unlimited number of taxable years.\124\ Also in contrast to the 
American Opportunity credit, the maximum amount of the Lifetime 
Learning credit that may be claimed on a taxpayer's return does 
not vary based on the number of students in the taxpayer's 
family--that is, the American Opportunity credit is computed on 
a per-student basis while the Lifetime Learning credit is 
computed on a family-wide basis. The Lifetime Learning credit 
amount that a taxpayer may otherwise claim is phased out 
ratably for taxpayers with modified AGI between $56,000 and 
$66,000 ($112,000 and $132,000 for married taxpayers filing a 
joint return) in 2017.
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    \124\Sec. 25A(a)(2).
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                               HOUSE BILL

      The House bill modifies the American Opportunity 
credit\125\ by providing that a credit may be claimed with 
respect to a student for five taxable years (rather than four 
taxable years under present law). For a credit claimed with 
respect to the student's fifth taxable year, the credit is half 
the value of the American Opportunity credit that is applicable 
to the first four taxable years (the refundable portion of the 
credit is 40-percent of the half-value credit). Additionally, 
the provision allows a student to claim the American 
Opportunity credit for any of the first five years of 
postsecondary education.
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    \125\The provision also repeals the Hope credit, a precursor to the 
American Opportunity credit which since 2009 has been largely 
superseded in the Code by the American Opportunity credit.
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      The operation of this provision is as follows. Assume 
that a student enters college in the Fall of 2018, attending 
for eight consecutive semesters, such that the student 
graduates in the Spring of 2022. Assume that qualifying tuition 
and fees for each semester is in excess of $5,000. For each of 
taxable years 2018, 2019, 2020 and 2021, an individual claiming 
the credit on behalf of the student would be eligible for the 
maximum credit of $2,500 (of which $1,000 is refundable). For 
taxable year 2022, a taxpayer claiming the credit on behalf of 
the student may be eligible for a $1,250 credit (of which $500 
is refundable). Alternatively, if no credit were claimed with 
respect to the student in 2022, and the student were to decide 
to attend graduate school in the Fall of 2024, the student may 
claim the half-value fifth year credit ($1,250 ($500 
refundable)) for the 2024 taxable year.
      The provision repeals the lifetime learning credit.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
10. Consolidation and modification of education savings rules (sec. 
        1202 of the House bill, sec. 11033 of the Senate amendment, and 
        secs. 529 and 530 of the Code)

                              PRESENT LAW

Coverdell education savings accounts
      A Coverdell education savings account is a trust or 
custodial account created exclusively for the purpose of paying 
qualified education expenses of a named beneficiary.\126\ 
Annual contributions to Coverdell education savings accounts 
may not exceed $2,000 per designated beneficiary and may not be 
made after the designated beneficiary reaches age 18 (except in 
the case of a special needs beneficiary). The contribution 
limit is phased out for taxpayers with modified AGI between 
$95,000 and $110,000 ($190,000 and $220,000 for married 
taxpayers filing a joint return); the AGI of the contributor, 
and not that of the beneficiary, controls whether a 
contribution is permitted by the taxpayer.
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    \126\Sec. 530.
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      Earnings on contributions to a Coverdell education 
savings account generally are subject to tax when 
withdrawn.\127\ However, distributions from a Coverdell 
education savings account are excludable from the gross income 
of the distributee (i.e., the student) to the extent that the 
distribution does not exceed the qualified education expenses 
incurred by the beneficiary during the year the distribution is 
made. The earnings portion of a Coverdell education savings 
account distribution not used to pay qualified education 
expenses is includible in the gross income of the distributee 
and generally is subject to an additional 10-percent tax.\128\
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    \127\In addition, Coverdell education savings accounts are subject 
to the unrelated business income tax imposed by section 511.
    \128\This 10-percent additional tax does not apply if a 
distribution from an education savings account is made on account of 
the death or disability of the designated beneficiary, or if made on 
account of a scholarship received by the designated beneficiary.
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      Tax-free (and free of additional 10-percent tax) 
transfers or rollovers of account balances from one Coverdell 
education savings account benefiting one beneficiary to another 
Coverdell education savings account benefiting another 
beneficiary (as well as redesignations of the named 
beneficiary) are permitted, provided that the new beneficiary 
is a member of the family of the prior beneficiary and is under 
age 30 (except in the case of a special needs beneficiary). In 
general, any balance remaining in a Coverdell education savings 
account is deemed to be distributed within 30 days after the 
date that the beneficiary reaches age 30 (or, if the 
beneficiary dies before attaining age 30, within 30 days of the 
date that the beneficiary dies).
      Qualified education expenses include qualified elementary 
and secondary expenses and qualified higher education expenses. 
Such qualified education expenses generally include only out-
of-pocket expenses. They do not include expenses covered by 
employer-provided educational assistance or scholarships for 
the benefit of the beneficiary that are excludable from gross 
income.
      The term qualified elementary and secondary school 
expenses, means expenses for: (1) tuition, fees, academic 
tutoring, special needs services, books, supplies, and other 
equipment incurred in connection with the enrollment or 
attendance of the beneficiary at a public, private, or 
religious school providing elementary or secondary education 
(kindergarten through grade 12) as determined under State law; 
(2) room and board, uniforms, transportation, and supplementary 
items or services (including extended day programs) required or 
provided by such a school in connection with such enrollment or 
attendance of the beneficiary; and (3) the purchase of any 
computer technology or equipment (as defined in section 
170(e)(6)(F)(i)) or internet access and related services, if 
such technology, equipment, or services are to be used by the 
beneficiary and the beneficiary's family during any of the 
years the beneficiary is in elementary or secondary school. 
Computer software primarily involving sports, games, or hobbies 
is not considered a qualified elementary and secondary school 
expense unless the software is predominantly educational in 
nature.
      The term qualified higher education expenses includes 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of the designated beneficiary at an 
eligible education institution, regardless of whether the 
beneficiary is enrolled at an eligible educational institution 
on a full-time, half-time, or less than half-time basis.\129\ 
Moreover, qualified higher education expenses include certain 
room and board expenses for any period during which the 
beneficiary is at least a half-time student. Qualified higher 
education expenses include expenses with respect to 
undergraduate or graduate-level courses. In addition, qualified 
higher education expenses include amounts paid or incurred to 
purchase tuition credits (or to make contributions to an 
account) under a qualified tuition program for the benefit of 
the beneficiary of the Coverdell education savings 
account.\130\
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    \129\Qualified higher education expenses are defined in the same 
manner as for qualified tuition programs.
    \130\Sec. 530(b)(2)(B).
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Section 529 qualified tuition programs
            In general
      A qualified tuition program is a program established and 
maintained by a State or agency or instrumentality thereof, or 
by one or more eligible educational institutions, which 
satisfies certain requirements and under which a person may 
purchase tuition credits or certificates on behalf of a 
designated beneficiary that entitle the beneficiary to the 
waiver or payment of qualified higher education expenses of the 
beneficiary (a ``prepaid tuition program''). Section 529 
provides specified income tax and transfer tax rules for the 
treatment of accounts and contracts established under qualified 
tuition programs.\131\ In the case of a program established and 
maintained by a State or agency or instrumentality thereof, a 
qualified tuition program also includes a program under which a 
person may make contributions to an account that is established 
for the purpose of satisfying the qualified higher education 
expenses of the designated beneficiary of the account, provided 
it satisfies certain specified requirements (a ``savings 
account program''). Under both types of qualified tuition 
programs, a contributor establishes an account for the benefit 
of a particular designated beneficiary to provide for that 
beneficiary's higher education expenses.
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    \131\For purposes of this description, the term ``account'' is used 
interchangeably to refer to a prepaid tuition benefit contract or a 
tuition savings account established pursuant to a qualified tuition 
program.
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      In general, prepaid tuition contracts and tuition savings 
accounts established under a qualified tuition program involve 
prepayments or contributions made by one or more individuals 
for the benefit of a designated beneficiary. Decisions with 
respect to the contract or account are typically made by an 
individual who is not the designated beneficiary. Qualified 
tuition accounts or contracts generally require the designation 
of a person (generally referred to as an ``account 
owner'')\132\ whom the program administrator (oftentimes a 
third party administrator retained by the State or by the 
educational institution that established the program) may look 
to for decisions, recordkeeping, and reporting with respect to 
the account established for a designated beneficiary. The 
person or persons who make the contributions to the account 
need not be the same person who is regarded as the account 
owner for purposes of administering the account. Under many 
qualified tuition programs, the account owner generally has 
control over the account or contract, including the ability to 
change designated beneficiaries and to withdraw funds at any 
time and for any purpose. Thus, in practice, qualified tuition 
accounts or contracts generally involve a contributor, a 
designated beneficiary, an account owner (who oftentimes is not 
the contributor or the designated beneficiary), and an 
administrator of the account or contract.
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    \132\Section 529 refers to contributors and designated 
beneficiaries, but does not define or otherwise refer to the term 
``account owner,'' which is a commonly used term among qualified 
tuition programs.
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            Qualified higher education expenses
      For purposes of receiving a distribution from a qualified 
tuition program that qualifies for favorable tax treatment 
under the Code, qualified higher education expenses means 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of a designated beneficiary at an 
eligible educational institution, and expenses for special 
needs services in the case of a special needs beneficiary that 
are incurred in connection with such enrollment or attendance. 
Qualified higher education expenses generally also include room 
and board for students who are enrolled at least half-time. 
Qualified higher education expenses include the purchase of any 
computer technology or equipment, or Internet access or related 
services, if such technology or services were to be used 
primarily by the beneficiary during any of the years a 
beneficiary is enrolled at an eligible institution.
            Contributions to qualified tuition programs
      Contributions to a qualified tuition program must be made 
in cash. Section 529 does not impose a specific dollar limit on 
the amount of contributions, account balances, or prepaid 
tuition benefits relating to a qualified tuition account; 
however, the program is required to have adequate safeguards to 
prevent contributions in excess of amounts necessary to provide 
for the beneficiary's qualified higher education expenses. 
Contributions generally are treated as a completed gift 
eligible for the gift tax annual exclusion. Contributions are 
not tax deductible for Federal income tax purposes, although 
they may be deductible for State income tax purposes. Amounts 
in the account accumulate on a tax-free basis (i.e., income on 
accounts in the plan is not subject to current income tax).
      A qualified tuition program may not permit any 
contributor to, or designated beneficiary under, the program to 
direct (directly or indirectly) the investment of any 
contributions (or earnings thereon) more than two times in any 
calendar year, and must provide separate accounting for each 
designated beneficiary. A qualified tuition program may not 
allow any interest in an account or contract (or any portion 
thereof) to be used as security for a loan.

                               HOUSE BILL

      Under the House bill, no new contributions are permitted 
into Coverdell savings accounts after December 31, 2017. 
However, rollovers of account balances from one Coverdell 
education savings account to another pre-existing Coverdell 
education savings account benefiting another beneficiary remain 
permitted after this date. Additionally, the provision allows 
section 529 plans to receive rollover contributions from 
Coverdell education savings accounts.
      The provision modifies section 529 plans to allow such 
plans to distribute not more than $10,000 in expenses for 
tuition incurred during the taxable year in connection with the 
enrollment or attendance of the designated beneficiary at a 
public, private or religious elementary or secondary school. 
This limitation applies on a per-student basis, rather than a 
per-account basis. Thus, under the provision, although an 
individual may be the designated beneficiary of multiple 
accounts, that individual may receive a maximum of $10,000 in 
distributions free of tax, regardless of whether the funds are 
distributed from multiple accounts. Any excess distributions 
received by the individual would be treated as a distribution 
subject to tax under the general rules of section 529.
      The provision also modifies section 529 plans to allow 
such plan distributions to be used for certain expenses, 
including books, supplies, and equipment, required for 
attendance in a registered apprenticeship program. Registered 
apprenticeship programs are apprenticeship programs registered 
and certified with the Secretary of Labor.
      Finally, the provision specifies that nothing in this 
section shall prevent an unborn child from qualifying as a 
designated beneficiary. For these purposes, an unborn child 
means a child in utero, and the term child in utero means a 
member of the species homo sapiens, at any stage of 
development, who is carried in the womb.
      Effective date.--The provision applies to contributions 
and distributions made after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment modifies section 529 plans to allow 
such plans to distribute not more than $10,000 in expenses for 
tuition incurred during the taxable year in connection with the 
enrollment or attendance of the designated beneficiary at a 
public, private or religious elementary or secondary school. 
This limitation applies on a per-student basis, rather than a 
per-account basis. Thus, under the provision, although an 
individual may be the designated beneficiary of multiple 
accounts, that individual may receive a maximum of $10,000 in 
distributions free of tax, regardless of whether the funds are 
distributed from multiple accounts. Any excess distributions 
received by the individual would be treated as a distribution 
subject to tax under the general rules of section 529.
      The provision also modifies the definition of higher 
education expenses to include certain expenses incurred in 
connection with a homeschool. Those expenses are (1) curriculum 
and curricular materials; (2) books or other instructional 
materials; (3) online educational materials; (4) tuition for 
tutoring or educational classes outside of the home (but only 
if the tutor or instructor is not related to the student); (5) 
dual enrollment in an institution of higher education; and (6) 
educational therapies for students with disabilities.
      Effective date.--The provision applies to distributions 
made after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
11. Reforms to discharge of certain student loan indebtedness (sec. 
        1203 of the House bill, sec. 11031 of the Senate amendment, and 
        sec. 108 of the Code)

                              PRESENT LAW

      Gross income generally includes the discharge of 
indebtedness of the taxpayer. Under an exception to this 
general rule, gross income does not include any amount from the 
forgiveness (in whole or in part) of certain student loans, 
provided that the forgiveness is contingent on the student's 
working for a certain period of time in certain professions for 
any of a broad class of employers.\133\
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    \133\Sec. 108(f).
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      Student loans eligible for this special rule must be made 
to an individual to assist the individual in attending an 
educational institution that normally maintains a regular 
faculty and curriculum and normally has a regularly enrolled 
body of students in attendance at the place where its education 
activities are regularly carried on. Loan proceeds may be used 
not only for tuition and required fees, but also to cover room 
and board expenses. The loan must be made by (1) the United 
States (or an instrumentality or agency thereof), (2) a State 
(or any political subdivision thereof), (3) certain tax-exempt 
public benefit corporations that control a State, county, or 
municipal hospital and whose employees have been deemed to be 
public employees under State law, or (4) an educational 
organization that originally received the funds from which the 
loan was made from the United States, a State, or a tax-exempt 
public benefit corporation.
      In addition, an individual's gross income does not 
include amounts from the forgiveness of loans made by 
educational organizations (and certain tax-exempt organizations 
in the case of refinancing loans) out of private, 
nongovernmental funds if the proceeds of such loans are used to 
pay costs of attendance at an educational institution or to 
refinance any outstanding student loans (not just loans made by 
educational organizations) and the student is not employed by 
the lender organization. In the case of such loans made or 
refinanced by educational organizations (or refinancing loans 
made by certain tax-exempt organizations), cancellation of the 
student loan must be contingent on the student working in an 
occupation or area with unmet needs and such work must be 
performed for, or under the direction of, a tax-exempt 
charitable organization or a governmental entity.
      Finally, an individual's gross income does not include 
any loan repayment amount received under the National Health 
Service Corps loan repayment program, certain State loan 
repayment programs, or any amount received by an individual 
under any State loan repayment or loan forgiveness program that 
is intended to provide for the increased availability of health 
care services in underserved or health professional shortage 
areas (as determined by the State).

                               HOUSE BILL

      The House bill modifies the exclusion of student loan 
discharges from gross income, by including within the exclusion 
certain discharges on account of death or disability. Loans 
eligible for the exclusion under the provision are loans made 
by (1) the United States (or an instrumentality or agency 
thereof), (2) a State (or any political subdivision thereof), 
(3) certain tax-exempt public benefit corporations that control 
a State, county, or municipal hospital and whose employees have 
been deemed to be public employees under State law, (4) an 
educational organization that originally received the funds 
from which the loan was made from the United States, a State, 
or a tax-exempt public benefit corporation, or (5) private 
education loans (for this purpose, private education loan is 
defined in section 140(7) of the Consumer Protection Act).\134\
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    \134\15 U.S.C. 1650(7).
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      Under the provision, the discharge of a loan as described 
above is excluded from gross income if the discharge was 
pursuant to the death or total and permanent disability of the 
student.\135\
---------------------------------------------------------------------------
    \135\Although the provision makes specific reference to those 
provisions of the Higher Education Act of 1965 that discharge William 
D. Ford Federal Direct Loan Program loans, Federal Family Education 
Loan Program loans, and Federal Perkins Loan Program loans in the case 
of death and total and permanent disability, the provision also 
contains a catch-all exclusion in the case of a student loan discharged 
on account of the death or total and permanent disability of the 
student, in addition to those specific statutory references.
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      Additionally, the provision modifies the gross income 
exclusion for amounts received under the National Health 
Service Corps loan repayment program or certain State loan 
repayment programs to include any amount received by an 
individual under the Indian Health Service loan repayment 
program.\136\
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    \136\Section 108 of the Indian Health Care Improvement Act 
established the Indian Health Service loan repayment program to assure 
a sufficient supply of trained health professionals needed to provide 
health care services to Indians. Pub. L. No. 94-437, as amended by Pub. 
L. No. 100-713, sec. 108, and Pub. L. No. 102-573, sec. 106, and as 
amended, and permanently reauthorized by Pub. L. No. 111-148, sec. 
10221.
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      Effective date.--The provision applies to discharges of 
loans after, and amounts received after, December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment generally follows the House bill. 
However, the Senate amendment does not contain the provision in 
the House bill excluding amounts received under the Indian 
Health Service loan repayment program from income.
      Additionally, the Senate amendment does not apply to 
discharges of indebtedness occurring after December 31, 2025.
      Effective date.--The provision is effective for 
discharges of indebtedness after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
12. Repeal of deduction for student loan interest (sec. 1204 of the 
        House bill and sec. 221 of the Code)

                              PRESENT LAW

      Certain individuals who have paid interest on qualified 
education loans may claim an above-the-line deduction for such 
interest expenses, subject to a maximum annual deduction 
limit.\137\ Required payments of interest generally do not 
include voluntary payments, such as interest payments made 
during a period of loan forbearance. No deduction is allowed to 
an individual if that individual is claimed as a dependent on 
another taxpayer's return for the taxable year.\138\
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    \137\Sec. 221.
    \138\Sec. 221(c).
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      A qualified education loan generally is defined as any 
indebtedness incurred solely to pay for the costs of attendance 
(including room and board) of the taxpayer, the taxpayer's 
spouse, or any dependent of the taxpayer as of the time the 
indebtedness was incurred in attending on at least a half-time 
basis (1) eligible educational institutions, or (2) 
institutions conducting internship or residency programs 
leading to a degree or certificate from an institution of 
higher education, a hospital, or a health care facility 
conducting postgraduate training. The cost of attendance is 
reduced by any amount excluded from gross income under the 
exclusions for qualified scholarships and tuition reductions, 
employer-provided educational assistance, interest earned on 
education savings bonds, qualified tuition programs, and 
Coverdell education savings accounts, as well as the amount of 
certain other scholarships and similar payments.
      The maximum allowable deduction per year is $2,500.\139\ 
For 2017, the deduction is phased out ratably for taxpayers 
with AGI between $65,000 and $80,000 ($135,000 and $165,000 for 
married taxpayers filing a joint return). The income phase-out 
ranges are indexed for inflation and rounded to the next lowest 
multiple of $5,000.
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    \139\Sec. 221(b)(1).
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                               HOUSE BILL

      The provision repeals the deduction for student loan 
interest.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
13. Repeal of deduction for qualified tuition and related expenses 
        (sec. 1204 of the House bill and sec. 222 of the Code)

                              PRESENT LAW

      For taxable years beginning before January 1, 2017, an 
individual is allowed an above-the-line deduction for qualified 
tuition and related expenses for higher education paid by the 
individual during the taxable year.\140\ Qualified tuition 
includes tuition and fees required for the enrollment or 
attendance by the taxpayer, the taxpayer's spouse, or any 
dependent of the taxpayer with respect to whom the taxpayer may 
claim a personal exemption, at an eligible institution of 
higher education for courses of instruction of such individual 
at such institution. The expenses must be in connection with 
enrollment at an institution of higher education during the 
taxable year, or with an academic term beginning during the 
taxable year or during the first three months of the next 
taxable year. The deduction is not available for tuition and 
related expenses paid for elementary or secondary education.
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    \140\Sec. 222(a).
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      The maximum deduction is $4,000 for an individual whose 
AGI for the taxable year does not exceed $65,000 ($130,000 in 
the case of a joint return), or $2,000 for other individuals 
whose AGI does not exceed $80,000 ($160,000 in the case of a 
joint return).\141\ No deduction is allowed for an individual 
whose AGI exceeds the relevant AGI limitations, for a married 
individual who does not file a joint return, or for an 
individual with respect to whom a personal exemption deduction 
may be claimed by another taxpayer for the taxable year. The 
deduction is not available for taxable years beginning after 
December 31, 2016.
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    \141\Sec. 222(b)(2)(B).
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                               HOUSE BILL

      The provision repeals the deduction for qualified tuition 
and related expenses.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
14. Repeal of exclusion for qualified tuition reductions (sec. 1204 of 
        the House bill and sec. 117(d) of the Code)

                              PRESENT LAW

      Qualified tuition reductions for certain education 
provided to employees (and their spouses and dependents\142\) 
of certain educational organizations are excludible from gross 
income.\143\ The tuition reduction is subject to 
nondiscrimination rules.\144\ The exclusion generally applies 
below the graduate level, and to teaching and research 
assistants who are students at the graduate level, but does not 
apply to any amount received by a student that represents 
payment for teaching, research or other services by the student 
required as a condition for receiving the tuition reduction. 
Amounts that are excludible from gross income for income tax 
purposes are also excluded from wages for employment tax 
purposes.
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    \142\Individuals described under the rules of Sec. 132(h).
    \143\Educational organization described in section 
170(b)(1)(A)(ii). Sec. 117(d)(2).
    \144\The exclusion applies with respect to highly compensated 
employees, within the meaning of Sec. 414(q), only if such tuition 
reductions are available on substantially the same terms to each member 
of a group of employees which is defined under a reasonable 
classification established by the employer, such that the benefit does 
not discriminate in favor of highly compensated employees.
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                               HOUSE BILL

      The provision repeals the exclusions from gross income 
and wages for qualified tuition reductions.
      Effective date.--The provision applies to amounts paid or 
incurred after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
15. Repeal of exclusion for interest on United States savings bonds 
        used for higher education expenses (sec. 1204 of the House bill 
        and sec. 135 of the Code)

                              PRESENT LAW

      Interest earned on a qualified United States Series EE 
savings bond issued after 1989 is excludable from gross income 
if the proceeds of the bond upon redemption do not exceed 
qualified higher education expenses paid by the taxpayer during 
the taxable year.\145\ Qualified higher education expenses 
include tuition and fees (but not room and board expenses) 
required for the enrollment or attendance of the taxpayer, the 
taxpayer's spouse, or a dependent of the taxpayer at certain 
eligible higher educational institutions. The amount of 
qualified higher education expenses taken into account for 
purposes of the exclusion is reduced by the amount of such 
expenses taken into account in determining the Hope, American 
Opportunity, or Lifetime Learning credits claimed by any 
taxpayer, or taken into account in determining an exclusion 
from gross income for a distribution from a qualified tuition 
program or a Coverdell education savings account, with respect 
to a particular student for the taxable year.
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    \145\Sec. 135.
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      The exclusion is phased out for certain higher-income 
taxpayers, determined by the taxpayer's modified AGI during the 
year the bond is redeemed. For 2017, the exclusion is phased 
out for taxpayers with modified AGI between $78,150 and $93,150 
($117,250 and $147,250 for married taxpayers filing a joint 
return). To prevent taxpayers from effectively avoiding the 
income phaseout limitation through the purchase of bonds 
directly in the child's name, the interest exclusion is 
available only with respect to U.S. Series EE savings bonds 
issued to taxpayers who are at least 24 years old.

                               HOUSE BILL

      The House bill repeals exclusion for interest on Series 
EE savings bond used for qualified higher education expenses.
      Effective date.--The provision generally applies to 
taxable years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
16. Repeal of exclusion for educational assistance programs (sec. 1204 
        of the House bill and sec. 127 of the Code)

                              PRESENT LAW

      Up to $5,250 annually of educational assistance provided 
by an employer to an employee is excludible from the employee's 
gross income, provided that certain requirements are 
satisfied.\146\ Nondiscrimination rules\147\ apply and the 
educational assistance must be provided pursuant to a separate 
written plan of the employer. The exclusion applies to both 
graduate and undergraduate courses, and applies only with 
respect to education provided to the employee (i.e., it does 
not apply to education provided to the spouse or a child of the 
employee). Amounts that are excludible from gross income for 
income tax purposes are also excluded from wages for employment 
tax purposes.
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    \146\Sec. 127(a).
    \147\The employer's educational assistance program must not 
discriminate in favor of highly compensated employees, within the 
meaning of Sec. 414(q). In addition, no more than five percent of the 
amounts paid or incurred by the employer during the year for 
educational assistance under a qualified educational assistance program 
can be provided for the class of individuals consisting of more-than-
five-percent owners of the employer and the spouses or dependents of 
such more-than-five-percent owners.
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      For purposes of the exclusion, educational assistance 
means the payment by an employer of expenses incurred by or on 
behalf of the employee for education of the employee including, 
but not limited to, tuition, fees and similar payments, books, 
supplies, and equipment. Educational assistance also includes 
the provision by the employer of courses of instruction for the 
employee (including books, supplies, and equipment). 
Educational assistance does not include (1) tools or supplies 
that may be retained by the employee after completion of a 
course, (2) meals, lodging, or transportation, and (3) any 
education involving sports, games, or hobbies.

                               HOUSE BILL

      The provision repeals the exclusions from gross income 
and wages for educational assistance programs.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
17. Rollovers between qualified tuition programs and qualified ABLE 
        programs (sec. 1205 of the House bill, sec. 11025 of the Senate 
        amendment and secs. 529 and 529A of the Code)

                              PRESENT LAW

Qualified ABLE programs
      The Code provides for a tax-favored savings program 
intended to benefit disabled individuals, known as qualified 
ABLE programs.\148\ A qualified ABLE program is a program 
established and maintained by a State or agency or 
instrumentality thereof. A qualified ABLE program must meet the 
following conditions: (1) under the provisions of the program, 
contributions may be made to an account (an ``ABLE account''), 
established for the purpose of meeting the qualified disability 
expenses of the designated beneficiary of the account; (2) the 
program must limit a designated beneficiary to one ABLE 
account; and (3) the program must meet certain other 
requirements discussed below. A qualified ABLE program is 
generally exempt from income tax, but is otherwise subject to 
the taxes imposed on the unrelated business income of tax-
exempt organizations.
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    \148\Sec. 529A.
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      A designated beneficiary of an ABLE account is the owner 
of the ABLE account. A designated beneficiary must be an 
eligible individual (defined below) who established the ABLE 
account and who is designated at the commencement of 
participation in the qualified ABLE program as the beneficiary 
of amounts paid (or to be paid) into and from the program.
      Contributions to an ABLE account must be made in cash and 
are not deductible for Federal income tax purposes. Except in 
the case of a rollover contribution from another ABLE account, 
an ABLE account must provide that it may not receive aggregate 
contributions during a taxable year in excess of the amount 
under section 2503(b) of the Code (the annual gift tax 
exemption). For 2017, this is $14,000.\149\ Additionally, a 
qualified ABLE program must provide adequate safeguards to 
ensure that ABLE account contributions do not exceed the limit 
imposed on accounts under the qualified tuition program of the 
State maintaining the qualified ABLE program. Amounts in the 
account accumulate on a tax-deferred basis (i.e., income on 
accounts under the program is not subject to current income 
tax).
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    \149\This amount is indexed for inflation. In the case that 
contributions to an ABLE account exceed the annual limit, an excise tax 
in the amount of six percent of the excess contribution to such account 
is imposed on the designated beneficiary. Such tax does not apply in 
the event that the trustee of such account makes a corrective 
distribution of such excess amounts by the due date (including 
extensions) of the individual's tax return for the year within the 
taxable year.
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      A qualified ABLE program may permit a designated 
beneficiary to direct (directly or indirectly) the investment 
of any contributions (or earnings thereon) no more than two 
times in any calendar year and must provide separate accounting 
for each designated beneficiary. A qualified ABLE program may 
not allow any interest in the program (or any portion thereof) 
to be used as security for a loan.
      Distributions from an ABLE account are generally 
includible in the distributee's income to the extent consisting 
of earnings on the account.\150\ Distributions from an ABLE 
account are excludable from income to the extent that the total 
distribution does not exceed the qualified disability expenses 
of the designated beneficiary during the taxable year. If a 
distribution from an ABLE account exceeds the qualified 
disability expenses of the designated beneficiary, a pro rata 
portion of the distribution is excludable from income. The 
portion of any distribution that is includible in income is 
subject to an additional 10-percent tax unless the distribution 
is made after the death of the beneficiary. Amounts in an ABLE 
account may be rolled over without income tax liability to 
another ABLE account for the same beneficiary\151\ or another 
ABLE account for the designated beneficiary's brother, sister, 
stepbrother or stepsister who is also an eligible individual.
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    \150\The rules of section 72 apply in determining the portion of a 
distribution that consists of earnings.
    \151\For instance, if a designated beneficiary were to relocate to 
a different State.
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      Except in the case of an ABLE account established in a 
different ABLE program for purposes of transferring ABLE 
accounts,\152\ no more than one ABLE account may be established 
by a designated beneficiary. Thus, once an ABLE account has 
been established by a designated beneficiary, no account 
subsequently established by such beneficiary shall be treated 
as an ABLE account.
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    \152\In which case the contributor ABLE account must be closed 60 
days after the transfer to the new ABLE account is made.
---------------------------------------------------------------------------
      A contribution to an ABLE account is treated as a 
completed gift of a present interest to the designated 
beneficiary of the account. Such contributions qualify for the 
per-donee annual gift tax exclusion ($14,000 for 2017) and, to 
the extent of such exclusion, are exempt from the generation 
skipping transfer (``GST'') tax. A distribution from an ABLE 
account generally is not subject to gift tax or GST tax.
            Eligible individuals
      As described above, a qualified ABLE program may provide 
for the establishment of ABLE accounts only if those accounts 
are established and owned by an eligible individual, such owner 
referred to as a designated beneficiary. For these purposes, an 
eligible individual is an individual either (1) for whom a 
disability certification has been filed with the Secretary for 
the taxable year, or (2) who is entitled to Social Security 
Disability Insurance benefits or SSI benefits\153\ based on 
blindness or disability, and such blindness or disability 
occurred before the individual attained age 26.
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    \153\These are benefits, respectively, under Title II or Title XVI 
of the Social Security Act.
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      A disability certification means a certification to the 
satisfaction of the Secretary, made by the eligible individual 
or the parent or guardian of the eligible individual, that the 
individual has a medically determinable physical or mental 
impairment, which results in marked and severe functional 
limitations, and which can be expected to result in death or 
which has lasted or can be expected to last for a continuous 
period of not less than 12 months, or is blind (within the 
meaning of section 1614(a)(2) of the Social Security Act). Such 
blindness or disability must have occurred before the date the 
individual attained age 26. Such certification must include a 
copy of the diagnosis of the individual's impairment and be 
signed by a licensed physician.\154\
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    \154\No inference may be drawn from a disability certification for 
purposes of eligibility for Social Security, SSI or Medicaid benefits.
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            Qualified disability expenses
      As described above, the earnings on distributions from an 
ABLE account are excluded from income only to the extent total 
distributions do not exceed the qualified disability expenses 
of the designated beneficiary. For this purpose, qualified 
disability expenses are any expenses related to the eligible 
individual's blindness or disability which are made for the 
benefit of the designated beneficiary. Such expenses include 
the following expenses: education, housing, transportation, 
employment training and support, assistive technology and 
personal support services, health, prevention and wellness, 
financial management and administrative services, legal fees, 
expenses for oversight and monitoring, funeral and burial 
expenses, and other expenses, which are approved by the 
Secretary under regulations and consistent with the purposes of 
section 529A.
            Transfer to State
      In the event that the designated beneficiary dies, 
subject to any outstanding payments due for qualified 
disability expenses incurred by the designated beneficiary, all 
amounts remaining in the deceased designated beneficiary's ABLE 
account not in excess of the amount equal to the total medical 
assistance paid such individual under any State Medicaid plan 
established under title XIX of the Social Security Act shall be 
distributed to such State upon filing of a claim for payment by 
such State. Such repaid amounts shall be net of any premiums 
paid from the account or by or on behalf of the beneficiary to 
the State's Medicaid Buy-In program.
            Treatment of ABLE accounts under Federal programs
      Any amounts in an ABLE account, and any distribution for 
qualified disability expenses, shall be disregarded for 
purposes of determining eligibility to receive, or the amount 
of, any assistance or benefit authorized by any Federal means-
tested program. However, in the case of the SSI program, a 
distribution for housing expenses is not disregarded, nor are 
amounts in an ABLE account in excess of $100,000. In the case 
that an individual's ABLE account balance exceeds $100,000, 
such individual's SSI benefits shall not be terminated, but 
instead shall be suspended until such time as the individual's 
resources fall below $100,000. However, such suspension shall 
not apply for purposes of Medicaid eligibility.

                               HOUSE BILL

      The House bill allows for amounts from qualified tuition 
programs (also known as 529 accounts) to be rolled over to an 
ABLE account without penalty, provided that the ABLE account is 
owned by the designated beneficiary of that 529 account, or a 
member of such designated beneficiary's family.\155\ Such 
rolled-over amounts count towards the overall limitation on 
amounts that can be contributed to an ABLE account within a 
taxable year.\156\ Any amount rolled over that is in excess of 
this limitation shall be includible in the gross income of the 
distributee in a manner provided by section 72.\157\
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    \155\For these purposes, a member of the family means, with respect 
to any designated beneficiary, the taxpayer's: (1) spouse; (2) child or 
descendant of a child; (3) brother, sister, stepbrother or stepsister; 
(4) father, mother or ancestor of either; (5) stepfather or stepmother; 
(6) niece or nephew; (7) aunt or uncle; (8) in-law; (9) the spouse of 
any individual described in (2)-(8); and (10) any first cousin of the 
designated beneficiary.
    \156\529A(b)(2)(B).
    \157\529(c)(3)(A).
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      Effective date.--The provision applies to distributions 
after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment generally follows the House Bill. 
Under the Senate amendment, the provision is not effective for 
distributions after December 31, 2025.
      Effective date.--The provision applies to distributions 
after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
18. Repeal of overall limitation on itemized deductions (sec. 1301 of 
        the House bill, sec. 11046 of the Senate amendment, and sec. 68 
        of the Code)

                              PRESENT LAW

      The total amount of most otherwise allowable itemized 
deductions (other than the deductions for medical expenses, 
investment interest and casualty, theft or gambling losses) is 
limited for certain upper-income taxpayers.\158\ All other 
limitations applicable to such deductions (such as the separate 
floors) are first applied and, then, the otherwise allowable 
total amount of itemized deductions is reduced by three percent 
of the amount by which the taxpayer's adjusted gross income 
exceeds a threshold amount.
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    \158\Sec. 68.
---------------------------------------------------------------------------
      For 2017, the threshold amounts are $261,500 for single 
taxpayers, $287,650 for heads of household, $313,800 for 
married couples filing jointly, and $156,900 for married 
taxpayers filing separately. These threshold amounts are 
indexed for inflation. The otherwise allowable itemized 
deductions may not be reduced by more than 80 percent by reason 
of the overall limit on itemized deductions.

                               HOUSE BILL

      The House bill repeals the overall limitation on itemized 
deductions.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill. Under the 
Senate amendment, the suspension of the overall limitation on 
itemized deductions does not apply to taxable years beginning 
after December 31, 2025.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

       D. Simplification and Reform of Deductions and Exclusions

1. Modification of deduction for home mortgage interest (sec. 1302 of 
        the House bill, sec. 11043 of the Senate amendment, and sec. 
        163(h) of the Code)

                              PRESENT LAW

      As a general matter, personal interest is not 
deductible.\159\ Qualified residence interest is not treated as 
personal interest and is allowed as an itemized deduction, 
subject to limitations.\160\ Qualified residence interest means 
interest paid or accrued during the taxable year on either 
acquisition indebtedness or home equity indebtedness. A 
qualified residence means the taxpayer's principal residence 
and one other residence of the taxpayer selected to be a 
qualified residence. A qualified residence can be a house, 
condominium, cooperative, mobile home, house trailer, or boat.
---------------------------------------------------------------------------
    \159\Sec. 163(h)(1).
    \160\Sec. 163(h)(2)(D) and (h)(3).
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Acquisition indebtedness
      Acquisition indebtedness is indebtedness that is incurred 
in acquiring, constructing, or substantially improving a 
qualified residence of the taxpayer and which secures the 
residence. The maximum amount treated as acquisition 
indebtedness is $1 million ($500,000 in the case of a married 
person filing a separate return).
      Acquisition indebtedness also includes indebtedness from 
the refinancing of other acquisition indebtedness but only to 
the extent of the amount (and term) of the refinanced 
indebtedness. Thus, for example, if the taxpayer incurs 
$200,000 of acquisition indebtedness to acquire a principal 
residence and pays down the debt to $150,000, the taxpayer's 
acquisition indebtedness with respect to the residence cannot 
thereafter be increased above $150,000 (except by indebtedness 
incurred to substantially improve the residence).
      Interest on acquisition indebtedness is allowable in 
computing alternative minimum taxable income. However, in the 
case of a second residence, the acquisition indebtedness may 
only be incurred with respect to a house, apartment, 
condominium, or a mobile home that is not used on a transient 
basis.
Home equity indebtedness
      Home equity indebtedness is indebtedness (other than 
acquisition indebtedness) secured by a qualified residence.
      The amount of home equity indebtedness may not exceed 
$100,000 ($50,000 in the case of a married individual filing a 
separate return) and may not exceed the fair market value of 
the residence reduced by the acquisition indebtedness.
      Interest on home equity indebtedness is not deductible in 
computing alternative minimum taxable income.
      Interest on qualifying home equity indebtedness is 
deductible, regardless of how the proceeds of the indebtedness 
are used. For example, personal expenditures may include health 
costs and education expenses for the taxpayer's family members 
or any other personal expenses such as vacations, furniture, or 
automobiles. A taxpayer and a mortgage company can contract for 
the home equity indebtedness loan proceeds to be transferred to 
the taxpayer in a lump sum payment (e.g., a traditional 
mortgage), a series of payments (e.g., a reverse mortgage), or 
the lender may extend the borrower a line of credit up to a 
fixed limit over the term of the loan (e.g., a home equity line 
of credit).
      Thus, the aggregate limitation on the total amount of a 
taxpayer's acquisition indebtedness and home equity 
indebtedness with respect to a taxpayer's principal residence 
and a second residence that may give rise to deductible 
interest is $1,100,000 ($550,000, for married persons filing a 
separate return).

                               HOUSE BILL

      The House bill modifies the home mortgage interest 
deduction in the following ways.
      First, under the provision, only interest paid on 
indebtedness used to acquire, construct or substantially 
improve the taxpayer's principal residence may be included in 
the calculation of the deduction. Thus, under the provision, a 
taxpayer receives no deduction for interest paid on 
indebtedness used to acquire a second home.
      Second, under the provision, a taxpayer may treat no more 
than $500,000 as principal residence acquisition indebtedness 
($250,000 in the case of married taxpayers filing separately). 
In the case of principal residence acquisition indebtedness 
incurred before the date of introduction (November 2, 2017), 
this limitation is $1,000,000 ($500,000 in the case of married 
taxpayers filing separately).\161\ Although the term principal 
residence acquisition indebtedness is not defined in the 
statute, it is intended that this ``grandfathering'' provision 
apply only with respect to indebtedness incurred with respect 
to a taxpayer's principal residence.
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    \161\Special rules apply in the case of indebtedness from 
refinancing existing principal residence acquisition indebtedness. 
Specifically, the $1,000,000 ($500,000 in the case of married taxpayers 
filing separately) limitation continues to apply to any indebtedness 
incurred on or after November 2, 2017, to refinance qualified residence 
indebtedness incurred before that date to the extent the amount of the 
indebtedness resulting from the refinancing does not exceed the amount 
of the refinanced indebtedness. Thus, the maximum dollar amount that 
may be treated as principal residence acquisition indebtedness will not 
decrease by reason of a refinancing.
---------------------------------------------------------------------------
      Last, under the provision, interest paid on home equity 
indebtedness is not treated as qualified residence interest, 
and thus is not deductible. This is the case regardless of when 
the home equity indebtedness was incurred.
      Effective date.--The provision is effective for interest 
paid or accrued in taxable years beginning after December 31, 
2017.

                            SENATE AMENDMENT

      The Senate amendment suspends the deduction for interest 
on home equity indebtedness. Thus, for taxable years beginning 
after December 31, 2017, a taxpayer may not claim a deduction 
for interest on home equity indebtedness. The suspension ends 
for taxable years beginning after December 31, 2025.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement provides that, in the case of 
taxable years beginning after December 31, 2017, and beginning 
before January 1, 2026, a taxpayer may treat no more than 
$750,000 as acquisition indebtedness ($375,000 in the case of 
married taxpayers filing separately). In the case of 
acquisition indebtedness incurred before December 15, 2017\162\ 
this limitation is $1,000,000 ($500,000 in the case of married 
taxpayers filing separately).\163\ For taxable years beginning 
after December 31, 2025, a taxpayer may treat up to $1,000,000 
($500,000 in the case of married taxpayers filing separately) 
of indebtedness as acquisition indebtedness, regardless of when 
the indebtedness was incurred.
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    \162\The conference agreement provides that a taxpayer who has 
entered into a binding written contract before December 15, 2017 to 
close on the purchase of a principal residence before January 1, 2018, 
and who purchases such residence before April 1, 2018, shall be 
considered to incurred acquisition indebtedness prior to December 15, 
2017 under this provision.
    \163\Special rules apply in the case of indebtedness from 
refinancing existing acquisition indebtedness. Specifically, the 
$1,000,000 ($500,000 in the case of married taxpayers filing 
separately) limitation continues to apply to any indebtedness incurred 
on or after December 15, 2017, to refinance qualified residence 
indebtedness incurred before that date to the extent the amount of the 
indebtedness resulting from the refinancing does not exceed the amount 
of the refinanced indebtedness. Thus, the maximum dollar amount that 
may be treated as principal residence acquisition indebtedness will not 
decrease by reason of a refinancing.
---------------------------------------------------------------------------
      Additionally, the conference agreement suspends the 
deduction for interest on home equity indebtedness. Thus, for 
taxable years beginning after December 31, 2017, a taxpayer may 
not claim a deduction for interest on home equity indebtedness. 
The suspension ends for taxable years beginning after December 
31, 2025.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.
2. Modification of deduction for taxes not paid or accrued in a trade 
        or business (sec. 1303 of the House bill, sec. 11042 of the 
        Senate amendment, and sec. 164 of the Code)

                              PRESENT LAW

      Individuals are permitted a deduction for certain taxes 
paid or accrued, whether or not incurred in a taxpayer's trade 
or business. These taxes are: (i) State and local real and 
foreign property taxes;\164\ (ii) State and local personal 
property taxes;\165\ (iii) State, local, and foreign income, 
war profits, and excess profits taxes.\166\ At the election of 
the taxpayer, an itemized deduction may be taken for State and 
local general sales taxes in lieu of the itemized deduction for 
State and local income taxes.\167\
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    \164\Sec. 164(a)(1).
    \165\Sec. 164(a)(2).
    \166\ Sec. 164(a)(3). A foreign tax credit, in lieu of a deduction, 
is allowable for foreign taxes if the taxpayer so elects.
    \167\Sec. 164(b)(5).
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      Property taxes may be allowed as a deduction in computing 
adjusted gross income if incurred in connection with property 
used in a trade or business; otherwise they are an itemized 
deduction. In the case of State and local income taxes, the 
deduction is an itemized deduction notwithstanding that the tax 
may be imposed on profits from a trade or business.\168\
---------------------------------------------------------------------------
    \168\See H. Rep. No. 1365 to accompany Individual Income Tax Bill 
of 1944 (78th Cong., 2d. Sess.), reprinted at 19 C.B. 839 (1944).
---------------------------------------------------------------------------
      Individuals also are permitted a deduction for Federal 
and State generation skipping transfer tax (``GST tax'') 
imposed on certain income distributions that are included in 
the gross income of the distributee.\169\
---------------------------------------------------------------------------
    \169\Sec. 164(a)(4).
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      In determining a taxpayer's alternative minimum taxable 
income, no itemized deduction for property, income, or sales 
tax is allowed.

                               HOUSE BILL

      Under the provision, in the case of an individual, as a 
general matter, State, local, and foreign property taxes and 
State and local sales taxes are allowed as a deduction only 
when paid or accrued in carrying on a trade or business, or an 
activity described in section 212 (relating to expenses for the 
production of income).\170\ Thus, the provision allows only 
those deductions for State, local, and foreign property taxes, 
and sales taxes, that are presently deductible in computing 
income on an individual's Schedule C, Schedule E, or Schedule F 
on such individual's tax return. Thus, for instance, in the 
case of property taxes, an individual may deduct such items 
only if these taxes were imposed on business assets (such as 
residential rental property).
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    \170\The proposal does not modify the deductibility of GST tax 
imposed on certain income distributions. Additionally, taxes imposed at 
the entity level, such as a business tax imposed on pass-through 
entities, that are reflected in a partner's or S corporation 
shareholder's distributive or pro-rata share of income or loss on a 
Schedule K-1 (or similar form), will continue to reduce such partner's 
or shareholder's distributive or pro-rata share of income as under 
present law.
---------------------------------------------------------------------------
      The provision contains an exception to the above-stated 
rule in the case of real property taxes. Under this exception, 
an individual may claim an itemized deduction of up to $10,000 
($5,000 for married taxpayer filing a separate return) for 
property taxes paid or accrued in the taxable year, in addition 
to any property taxes deducted in carrying on a trade or 
business or an activity described in section 212. Foreign real 
property taxes may not be deducted under this exception.
      Under the provision, in the case of an individual, State 
and local income, war profits, and excess profits taxes are not 
allowable as a deduction.
      It is intended that persons required to report refunds of 
State and local income taxes under section 6050E should no 
longer be required to report such refunds of tax relating to 
taxable years beginning after December 31, 2017. A technical 
amendment may be needed to reflect this intent.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill. However, 
under the Senate amendment, the suspension of the deduction for 
State and local taxes expires for taxable years beginning after 
December 31, 2025.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement provides that in the case of an 
individual,\171\ as a general matter, State, local, and foreign 
property taxes and State and local sales taxes are allowed as a 
deduction only when paid or accrued in carrying on a trade or 
business, or an activity described in section 212 (relating to 
expenses for the production of income).\172\ Thus, the 
provision allows only those deductions for State, local, and 
foreign property taxes, and sales taxes, that are presently 
deductible in computing income on an individual's Schedule C, 
Schedule E, or Schedule F on such individual's tax return. 
Thus, for instance, in the case of property taxes, an 
individual may deduct such items only if these taxes were 
imposed on business assets (such as residential rental 
property).
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    \171\See sec. 641(b) regarding the computation of taxable income of 
an estate or trust in the same manner as an individual.
    \172\The proposal does not modify the deductibility of GST tax 
imposed on certain income distributions. Additionally, taxes imposed at 
the entity level, such as a business tax imposed on pass-through 
entities, that are reflected in a partner's or S corporation 
shareholder's distributive or pro-rata share of income or loss on a 
Schedule K-1 (or similar form), will continue to reduce such partner's 
or shareholder's distributive or pro-rata share of income as under 
present law.
---------------------------------------------------------------------------
      Under the provision, in the case of an individual, State 
and local income, war profits, and excess profits taxes are not 
allowable as a deduction.
      The provision contains an exception to the above-stated 
rule. Under the provision a taxpayer may claim an itemized 
deduction of up to $10,000 ($5,000 for married taxpayer filing 
a separate return) for the aggregate of (i) State and local 
property taxes not paid or accrued in carrying on a trade or 
business, or an activity described in section 212, and (ii) 
State and local income, war profits, and excess profits taxes 
(or sales taxes in lieu of income, etc. taxes) paid or accrued 
in the taxable year. Foreign real property taxes may not be 
deducted under this exception.
      The above rules apply to taxable years beginning after 
December 31, 2017, and beginning before January 1, 2026.
      The conference agreement also provides that, in the case 
of an amount paid in a taxable year beginning before January 1, 
2018, with respect to a State or local income tax imposed for a 
taxable year beginning after December 31, 2017, the payment 
shall be treated as paid on the last day of the taxable year 
for which such tax is so imposed for purposes of applying the 
provision limiting the dollar amount of the deduction. Thus, 
under the provision, an individual may not claim an itemized 
deduction in 2017 on a pre-payment of income tax for a future 
taxable year in order to avoid the dollar limitation applicable 
for taxable years beginning after 2017.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2016.
3. Repeal of deduction for personal casualty and theft losses (sec. 
        1304 of the House bill, sec. 11044 of the Senate amendment, and 
        sec. 165 of the Code)

                              PRESENT LAW

      A taxpayer may generally claim a deduction for any loss 
sustained during the taxable year, not compensated by insurance 
or otherwise. For individual taxpayers, deductible losses must 
be incurred in a trade or business or other profit-seeking 
activity or consist of property losses arising from fire, 
storm, shipwreck, or other casualty, or from theft.\173\ 
Personal casualty or theft losses are deductible only if they 
exceed $100 per casualty or theft. In addition, aggregate net 
casualty and theft losses are deductible only to the extent 
they exceed 10 percent of an individual taxpayer's adjusted 
gross income.
---------------------------------------------------------------------------
    \173\Sec. 165(c).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill repeals the deduction for personal 
casualty and theft losses. However, notwithstanding the repeal 
of the deduction, the provision retains the benefit of the 
deduction, as modified by the Disaster Tax Relief and Airport 
and Airway Extension Act of 2017,\174\ for those individuals 
who sustained a personal casualty loss arising from hurricanes 
Harvey, Irma, or Maria.
---------------------------------------------------------------------------
    \174\Pub. L. No. 115-63.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for losses 
incurred in taxable years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment temporarily modifies the deduction 
for personal casualty and theft losses. Under the provision, a 
taxpayer may claim a personal casualty loss (subject to the 
limitations described above) only if such loss was attributable 
to a disaster declared by the President under section 401 of 
the Robert T. Stafford Disaster Relief and Emergency Assistance 
Act.
      The above-described limitation does not apply with 
respect to losses incurred after December 31, 2025.
      Effective date.--The provision is effective for losses 
incurred in taxable years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
4. Limitation on wagering losses (sec. 1305 of the House bill, sec. 
        11051 of the Senate amendment, and sec. 165 of the Code)

                              PRESENT LAW

      Losses sustained during the taxable year on wagering 
transactions are allowed as a deduction only to the extent of 
the gains during the taxable year from such transactions.\175\
---------------------------------------------------------------------------
    \175\Sec. 165(d).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill clarifies the scope of ``losses from 
wagering transactions'' as that term is used in section 165(d). 
Under the provision, this term includes any deduction otherwise 
allowable under chapter 1 of the Code incurred in carrying on 
any wagering transaction.
      The provision is intended to clarify that the limitation 
on losses from wagering transactions applies not only to the 
actual costs of wagers incurred by an individual, but to other 
expenses incurred by the individual in connection with the 
conduct of that individual's gambling activity.\176\ The 
provision clarifies, for instance, an individual's otherwise 
deductible expenses in traveling to or from a casino are 
subject to the limitation under section 165(d).
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    \176\The provision thus reverses the result reached by the Tax 
Court in Ronald A. Mayo v. Commissioner, 136 T.C. 81 (2011). In that 
case, the Court held that a taxpayer's expenses incurred in the conduct 
of the trade or business of gambling, other than the cost of wagers, 
were not limited by sec. 165(d), and were thus deductible under sec. 
162(a).
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill. However, the 
Senate amendment does not apply to taxable years beginning 
after December 31, 2025.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
5. Modifications to the deduction for charitable contributions (sec. 
        1306 of the House bill, secs. 11023, 13703, and 13704 of the 
        Senate amendment, and sec. 170 of the Code)

                              PRESENT LAW

In general
      The Internal Revenue Code allows taxpayers to reduce 
their income tax liability by taking deductions for 
contributions to certain organizations, including charities, 
Federal, State, local, and Indian tribal governments, and 
certain other organizations.
      To be deductible, a charitable contribution generally 
must meet several threshold requirements. First, the recipient 
of the transfer must be eligible to receive charitable 
contributions (i.e., an organization or entity described in 
section 170(c)). Second, the transfer must be made with 
gratuitous intent and without the expectation of a benefit of 
substantial economic value in return. Third, the transfer must 
be complete and generally must be a transfer of a donor's 
entire interest in the contributed property (i.e., not a 
contingent or partial interest contribution). To qualify for a 
current year charitable deduction, payment of the contribution 
must be made within the taxable year.\177\ Fourth, the transfer 
must be of money or property--contributions of services are not 
deductible.\178\ Finally, the transfer must be substantiated 
and in the proper form.
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    \177\Sec. 170(a)(1).
    \178\For example, as discussed in greater detail below, the value 
of time spent volunteering for a charitable organization is not 
deductible. Incidental expenses such as mileage, supplies, or other 
expenses incurred while volunteering for a charitable organization, 
however, may be deductible.
---------------------------------------------------------------------------
      As discussed below, special rules limit the deductibility 
of a taxpayer's charitable contributions in a given year to a 
percentage of income, and those rules, in part, turn on whether 
the organization receiving the contributions is a public 
charity or a private foundation. Other special rules determine 
the deductible value of contributed property for each type of 
property.
Contributions of partial interests in property
            In general
      In general, a charitable deduction is not allowed for 
income, estate, or gift tax purposes if the donor transfers an 
interest in property to a charity while retaining an interest 
in that property or transferring an interest in that property 
to a noncharity for less than full and adequate 
consideration.\179\ This rule of nondeductibility, often 
referred to as the partial interest rule, generally prohibits a 
charitable deduction for contributions of income interests, 
remainder interests, or rights to use property.
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    \179\Secs. 170(f)(3)(A) (income tax), 2055(e)(2) (estate tax), and 
2522(c)(2) (gift tax).
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      A charitable contribution deduction generally is not 
allowable for a contribution of a future interest in tangible 
personal property.\180\ For this purpose, a future interest is 
one ``in which a donor purports to give tangible personal 
property to a charitable organization, but has an 
understanding, arrangement, agreement, etc., whether written or 
oral, with the charitable organization that has the effect of 
reserving to, or retaining in, such donor a right to the use, 
possession, or enjoyment of the property.''\181\
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    \180\Sec. 170(a)(3).
    \181\Treas. Reg. sec. 1.170A-5(a)(4). Treasury regulations provide 
that section 170(a)(3), which generally denies a deduction for a 
contribution of a future interest in tangible personal property, has 
``no application in respect of a transfer of an undivided present 
interest in property. For example, a contribution of an undivided one-
quarter interest in a painting with respect to which the donee is 
entitled to possession during three months of each year shall be 
treated as made upon the receipt by the donee of a formally executed 
and acknowledged deed of gift. However, the period of initial 
possession by the donee may not be deferred in time for more than one 
year.'' Treas. Reg. sec. 1.170A-5(a)(2).
---------------------------------------------------------------------------
      A gift of an undivided portion of a donor's entire 
interest in property generally is not treated as a 
nondeductible gift of a partial interest in property.\182\ For 
this purpose, an undivided portion of a donor's entire interest 
in property must consist of a fraction or percentage of each 
and every substantial interest or right owned by the donor in 
such property and must extend over the entire term of the 
donor's interest in such property.\183\ A gift generally is 
treated as a gift of an undivided portion of a donor's entire 
interest in property if the donee is given the right, as a 
tenant in common with the donor, to possession, dominion, and 
control of the property for a portion of each year appropriate 
to its interest in such property.\184\
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    \182\Sec. 170(f)(3)(B)(ii).
    \183\Treas. Reg. sec. 1.170A-7(b)(1).
    \184\Treas. Reg. sec. 1.170A-7(b)(1).
---------------------------------------------------------------------------
      Other exceptions to the partial interest rule are 
provided for, among other interests: (1) remainder interests in 
charitable remainder annuity trusts, charitable remainder 
unitrusts, and pooled income funds; (2) present interests in 
the form of a guaranteed annuity or a fixed percentage of the 
annual value of the property; (3) a remainder interest in a 
personal residence or farm; and (4) qualified conservation 
contributions.
            Qualified conservation contributions
      Qualified conservation contributions are not subject to 
the partial interest rule, which generally bars deductions for 
charitable contributions of partial interests in property.\185\ 
A qualified conservation contribution is a contribution of a 
qualified real property interest to a qualified organization 
exclusively for conservation purposes. A qualified real 
property interest is defined as: (1) the entire interest of the 
donor other than a qualified mineral interest; (2) a remainder 
interest; or (3) a restriction (granted in perpetuity) on the 
use that may be made of the real property (generally, a 
conservation easement). Qualified organizations include certain 
governmental units, public charities that meet certain public 
support tests, and certain supporting organizations. 
Conservation purposes include: (1) the preservation of land 
areas for outdoor recreation by, or for the education of, the 
general public; (2) the protection of a relatively natural 
habitat of fish, wildlife, or plants, or similar ecosystem; (3) 
the preservation of open space (including farmland and forest 
land) where such preservation will yield a significant public 
benefit and is either for the scenic enjoyment of the general 
public or pursuant to a clearly delineated Federal, State, or 
local governmental conservation policy; and (4) the 
preservation of an historically important land area or a 
certified historic structure.
---------------------------------------------------------------------------
    \185\Secs. 170(f)(3)(B)(iii) and 170(h).
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Percentage limits on charitable contributions
            Individual taxpayers
      Charitable contributions by individual taxpayers are 
limited to a specified percentage of the individual's 
contribution base. The contribution base is the taxpayer's 
adjusted gross income (``AGI'') for a taxable year, 
disregarding any net operating loss carryback to the year under 
section 172.\186\ In general, more favorable (higher) 
percentage limits apply to contributions of cash and ordinary 
income property than to contributions of capital gain property. 
More favorable limits also generally apply to contributions to 
public charities (and certain operating foundations) than to 
contributions to nonoperating private foundations.
---------------------------------------------------------------------------
    \186\Sec. 170(b)(1)(G).
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      More specifically, the deduction for charitable 
contributions by an individual taxpayer of cash and property 
that is not appreciated to a charitable organization described 
in section 170(b)(1)(A) (public charities, private foundations 
other than nonoperating private foundations, and certain 
governmental units) may not exceed 50 percent of the taxpayer's 
contribution base. Contributions of this type of property to 
nonoperating private foundations generally may be deducted up 
to the lesser of 30 percent of the taxpayer's contribution base 
or the excess of (i) 50 percent of the contribution base over 
(ii) the amount of contributions subject to the 50 percent 
limitation.
      Contributions of appreciated capital gain property to 
public charities and other organizations described in section 
170(b)(1)(A) generally are deductible up to 30 percent of the 
taxpayer's contribution base (after taking into account 
contributions other than contributions of capital gain 
property). An individual may elect, however, to bring all these 
contributions of appreciated capital gain property for a 
taxable year within the 50-percent limitation category by 
reducing the amount of the contribution deduction by the amount 
of the appreciation in the capital gain property. Contributions 
of appreciated capital gain property to nonoperating private 
foundations are deductible up to the lesser of 20 percent of 
the taxpayer's contribution base or the excess of (i) 30 
percent of the contribution base over (ii) the amount of 
contributions subject to the 30 percent limitation.
      Finally, contributions that are for the use of (not to) 
the donee charity get less favorable percentage limits. 
Contributions of capital gain property for the use of public 
charities and other organizations described in section 
170(b)(1)(A) also are limited to 20 percent of the taxpayer's 
contribution base. Property contributed for the use of an 
organization generally has been interpreted to mean property 
contributed in trust for the organization.\187\ Charitable 
contributions of income interests (where deductible) also 
generally are treated as contributions for the use of the donee 
organization.
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    \187\Rockefeller v. Commissioner, 676 F.2d 35, 39 (2d Cir. 1982).

                TABLE 3.--CHARITABLE CONTRIBUTION PERCENTAGE LIMITS FOR INDIVIDUAL TAXPAYERS\188\
----------------------------------------------------------------------------------------------------------------
                                                                    Ordinary                       Capital Gain
                                                                     Income        Capital Gain    Property for
                                                                  Property and   Property to the  the use of the
                                                                      Cash        Recipient\189\     Recipient
----------------------------------------------------------------------------------------------------------------
Public Charities, Private Operating Foundations, and Private                50%         \190\30%             20%
 Distributing Foundations......................................
Nonoperating Private Foundations...............................             30%              20%             20%
----------------------------------------------------------------------------------------------------------------

            Corporate taxpayers
      A corporation generally may deduct charitable 
contributions up to 10 percent of the corporation's taxable 
income for the year.\191\ For this purpose, taxable income is 
determined without regard to: (1) the charitable contributions 
deduction; (2) any net operating loss carryback to the taxable 
year; (3) deductions for dividends received; (4) deductions for 
dividends paid on certain preferred stock of public utilities; 
and (5) any capital loss carryback to the taxable year.\192\
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    \188\Percentages shown are the percentage of an individual's 
contribution base.
    \189\Capital gain property contributed to public charities, private 
operating foundations, or private distributing foundations will be 
subject to the 50-percent limitation if the donor elects to reduce the 
fair market value of the property by the amount that would have been 
long-term capital gain if the property had been sold.
    \190\Certain qualified conservation contributions to public 
charities (generally, conservation easements), qualify for more 
generous contribution limits. In general, the 30-percent limit 
applicable to contributions of capital gain property is increased to 
100 percent if the individual making the qualified conservation 
contribution is a qualified farmer or rancher or to 50 percent if the 
individual is not a qualified farmer or rancher.
    \191\ Sec. 170(b)(2)(A).
    \192\ Sec. 170(b)(2)(C).
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            Carryforwards of excess contributions
      Charitable contributions that exceed the applicable 
percentage limit generally may be carried forward for up to 
five years.\193\ In general, contributions carried over from a 
prior year are taken into account after contributions for the 
current year that are subject to the same percentage limit. 
Excess contributions made for the use of (rather than to) an 
organization generally may not be carried forward.
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    \193\Sec. 170(d).
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            Qualified conservation contributions
      Preferential percentage limits and carryforward rules 
apply for qualified conservation contributions.\194\ In 
general, the 30-percent contribution base limitation on 
contributions of capital gain property by individuals does not 
apply to qualified conservation contributions. Instead, 
individuals may deduct the fair market value of any qualified 
conservation contribution to an organization described in 
section 170(b)(1)(A) (generally, public charities) to the 
extent of the excess of 50 percent of the contribution base 
over the amount of all other allowable charitable 
contributions. These contributions are not taken into account 
in determining the amount of other allowable charitable 
contributions. Individuals are allowed to carry forward any 
qualified conservation contributions that exceed the 50-percent 
limitation for up to 15 years. In the case of an individual who 
is a qualified farmer or rancher for the taxable year in which 
the contribution is made, a qualified conservation contribution 
is allowable up to 100 percent of the excess of the taxpayer's 
contribution base over the amount of all other allowable 
charitable contributions.
---------------------------------------------------------------------------
    \194\ Sec. 170(b)(1)(E).
---------------------------------------------------------------------------
      In the case of a corporation (other than a publicly 
traded corporation) that is a qualified farmer or rancher for 
the taxable year in which the contribution is made, any 
qualified conservation contribution is allowable up to 100 
percent of the excess of the corporation's taxable income (as 
computed under section 170(b)(2)) over the amount of all other 
allowable charitable contributions. Any excess may be carried 
forward for up to 15 years as a contribution subject to the 
100-percent limitation.\195\
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    \195\ Sec. 170(b)(2)(B).
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      A qualified farmer or rancher means a taxpayer whose 
gross income from the trade or business of farming (within the 
meaning of section 2032A(e)(5)) is greater than 50 percent of 
the taxpayer's gross income for the taxable year.
Valuation of charitable contributions
            In general
      For purposes of the income tax charitable deduction, the 
value of property contributed to charity may be limited to the 
fair market value of the property, the donor's tax basis in the 
property, or in some cases a different amount.
      Charitable contributions of cash are deductible in the 
amount contributed, subject to the percentage limits discussed 
above. In addition, a taxpayer generally may deduct the full 
fair market value of long-term capital gain property 
contributed to charity.\196\ Contributions of tangible personal 
property also generally are deductible at fair market value if 
the use by the recipient charitable organization is related to 
its tax-exempt purpose.
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    \196\Capital gain property means any capital asset or property used 
in the taxpayer's trade or business, the sale of which at its fair 
market value, at the time of contribution, would have resulted in gain 
that would have been long-term capital gain. Sec. 170(e)(1)(A).
---------------------------------------------------------------------------
      In certain other cases, however, section 170(e) limits 
the deductible value of the contribution of appreciated 
property to the donor's tax basis in the property. This 
limitation of the property's deductible value to basis 
generally applies, for example, for: (1) contributions of 
inventory or other ordinary income or short-term capital gain 
property;\197\ (2) contributions of tangible personal property 
if the use by the recipient charitable organization is 
unrelated to the organization's tax-exempt purpose;\198\ and 
(3) contributions to or for the use of a private foundation 
(other than certain private operating foundations).\199\
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    \197\Sec. 170(e). Special rules, discussed below, apply for certain 
contributions of inventory and other property.
    \198\Sec. 170(e)(1)(B)(i)(I).
    \199\Sec. 170(e)(1)(B)(ii). Certain contributions of patents or 
other intellectual property also generally are limited to the donor's 
basis in the property. Sec. 170(e)(1)(B)(iii). However, a special rule 
permits additional charitable deductions beyond the donor's tax basis 
in certain situations.
---------------------------------------------------------------------------
      For contributions of qualified appreciated stock, the 
above-described rule that limits the value of property 
contributed to or for the use of a private nonoperating 
foundation to the taxpayer's basis in the property does not 
apply; therefore, subject to certain limits, contributions of 
qualified appreciated stock to a nonoperating private 
foundation may be deducted at fair market value.\200\ Qualified 
appreciated stock is stock that is capital gain property and 
for which (as of the date of the contribution) market 
quotations are readily available on an established securities 
market.\201\ A contribution of qualified appreciated stock 
(when increased by the aggregate amount of all prior such 
contributions by the donor of stock in the corporation) 
generally does not include a contribution of stock to the 
extent the amount of the stock contributed exceeds 10 percent 
(in value) of all of the outstanding stock of the 
corporation.\202\
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    \200\Sec. 170(e)(5).
    \201\Sec. 170(e)(5)(B).
    \202\Sec. 170(e)(5)(C).
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      Contributions of property with a fair market value that 
is less than the donor's tax basis generally are deductible at 
the fair market value of the property.
            Enhanced deduction rules for certain contributions of 
                    inventory and other property
      Although most charitable contributions of property are 
valued at fair market value or the donor's tax basis in the 
property, certain statutorily described contributions of 
appreciated inventory and other property qualify for an 
enhanced deduction valuation that exceeds the donor's tax basis 
in the property, but which is less than the fair market value 
of the property.
      As discussed above, a taxpayer's deduction for charitable 
contributions of inventory property generally is limited to the 
taxpayer's basis (typically, cost) in the inventory, or if 
less, the fair market value of the property. For certain 
contributions of inventory, however, C corporations (but not 
other taxpayers) may claim an enhanced deduction equal to the 
lesser of (1) basis plus one-half of the item's appreciation 
(i.e., basis plus one-half of fair market value in excess of 
basis) or (2) two times basis.\203\ To be eligible for the 
enhanced deduction value, the contributed property generally 
must be inventory of the taxpayer, contributed to a charitable 
organization described in section 501(c)(3) (except for private 
nonoperating foundations), and the donee must (1) use the 
property consistent with the donee's exempt purpose solely for 
the care of the ill, the needy, or infants, (2) not transfer 
the property in exchange for money, other property, or 
services, and (3) provide the taxpayer a written statement that 
the donee's use of the property will be consistent with such 
requirements.\204\ Contributions to organizations that are not 
described in section 501(c)(3), such as governmental entities, 
do not qualify for this enhanced deduction.
---------------------------------------------------------------------------
    \203\Sec. 170(e)(3).
    \204\Sec. 170(e)(3)(A)(i)-(iii).
---------------------------------------------------------------------------
      To use the enhanced deduction provision, the taxpayer 
must establish that the fair market value of the donated item 
exceeds basis.
      A taxpayer engaged in a trade or business, whether or not 
a C corporation, is eligible to claim the enhanced deduction 
for certain donations of food inventory.\205\
---------------------------------------------------------------------------
    \205\Sec. 170(e)(3)(C).
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            Selected statutory rules for specific types of 
                    contributions
      Special statutory rules limit the deductible value (and 
impose enhanced reporting obligations on donors) of charitable 
contributions of certain types of property, including vehicles, 
intellectual property, and clothing and household items. Each 
of these rules was enacted in response to concerns that some 
taxpayers did not accurately report--and in many instances 
overstated--the value of the property for purposes of claiming 
a charitable deduction.
      Vehicle donations.--Under present law, the amount of 
deduction for charitable contributions of vehicles (generally 
including automobiles, boats, and airplanes for which the 
claimed value exceeds $500 and excluding inventory property) 
depends upon the use of the vehicle by the donee organization. 
If the donee organization sells the vehicle without any 
significant intervening use or material improvement of such 
vehicle by the organization, the amount of the deduction may 
not exceed the gross proceeds received from the sale. In other 
situations, a fair market value deduction may be allowed.
      Patents and other intellectual property.--If a taxpayer 
contributes a patent or other intellectual property (other than 
certain copyrights or inventory)\206\ to a charitable 
organization, the taxpayer's initial charitable deduction is 
limited to the lesser of the taxpayer's basis in the 
contributed property or the fair market value of the 
property.\207\ In addition, the taxpayer generally is permitted 
to deduct, as a charitable contribution, certain additional 
amounts in the year of contribution or in subsequent taxable 
years based on a specified percentage of the qualified donee 
income received or accrued by the charitable donee with respect 
to the contributed intellectual property. For this purpose, 
qualified donee income includes net income received or accrued 
by the donee that properly is allocable to the intellectual 
property itself (as opposed to the activity in which the 
intellectual property is used).\208\
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    \206\Under present and prior law, certain copyrights are not 
considered capital assets, such that the charitable deduction for such 
copyrights generally is limited to the taxpayer's basis. See sec. 
1221(a)(3), 1231(b)(1)(C).
    \207\Sec. 170(e)(1)(B)(iii).
    \208\The present-law rules allowing additional charitable 
deductions for qualified donee income were enacted as part of the 
American Jobs Creation Act of 2004, and are effective for contributions 
made after June 3, 2004. For a more detailed description of these 
rules, see Joint Committee on Taxation, General Explanation of Tax 
Legislation Enacted in the 108th Congress (JCS-5-05), May 2005, pp. 
457-461.
---------------------------------------------------------------------------
      Clothing and household items.--Charitable contributions 
of clothing and household items generally are subject to the 
charitable deduction rules applicable to tangible personal 
property. If such contributed property is appreciated property 
in the hands of the taxpayer, and is not used to further the 
donee's exempt purpose, the deduction is limited to basis. In 
most situations, however, clothing and household items have a 
fair market value that is less than the taxpayer's basis in the 
property. Because property with a fair market value less than 
basis generally is deductible at the property's fair market 
value, taxpayers generally may deduct only the fair market 
value of most contributions of clothing or household items, 
regardless of whether the property is used for exempt or 
unrelated purposes by the donee organization. Furthermore, a 
special rule generally provides that no deduction is allowed 
for a charitable contribution of clothing or a household item 
unless the item is in good used or better condition. The 
Secretary is authorized to deny by regulation a deduction for 
any contribution of clothing or a household item that has 
minimal monetary value, such as used socks and used 
undergarments. Notwithstanding the general rule, a charitable 
contribution of clothing or household items not in good used or 
better condition with a claimed value of more than $500 may be 
deducted if the taxpayer includes with the taxpayer's return a 
qualified appraisal with respect to the property.\209\ 
Household items include furniture, furnishings, electronics, 
appliances, linens, and other similar items. Food, paintings, 
antiques, and other objects of art, jewelry and gems, and 
certain collections are excluded from the special rules 
described in the preceding paragraph.\210\
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    \209\As is discussed above, the charitable contribution 
substantiation rules generally require a qualified appraisal where the 
claimed value of a contribution is more than $5,000.
    \210\The special rules concerning the deductibility of clothing and 
household items were enacted as part of the Pension Protection Act of 
2006, P.L. 109-280 (August 17, 2006), and are effective for 
contributions made after August 17, 2006. For a more detailed 
description of these rules, see Joint Committee on Taxation, General 
Explanation of Tax Legislation Enacted in the 109th Congress (JCS-1-
07), January 17, 2007, pp. 597-600.
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      College athletic seating rights.--In general, where a 
taxpayer receives or expects to receive a substantial return 
benefit for a payment to charity, the payment is not deductible 
as a charitable contribution. However, special rules apply to 
certain payments to institutions of higher education in 
exchange for which the payor receives the right to purchase 
tickets or seating at an athletic event. Specifically, the 
payor may treat 80 percent of a payment as a charitable 
contribution where: (1) the amount is paid to or for the 
benefit of an institution of higher education (as defined in 
section 3304(f)) described in section (b)(1)(A)(ii) (generally, 
a school with a regular faculty and curriculum and meeting 
certain other requirements), and (2) such amount would be 
allowable as a charitable deduction but for the fact that the 
taxpayer receives (directly or indirectly) as a result of the 
payment the right to purchase tickets for seating at an 
athletic event in an athletic stadium of such institution.\211\
---------------------------------------------------------------------------
    \211\Sec. 170(l).
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Use of a vehicle when volunteering for a charity
      Unreimbursed out-of-pocket expenditures made incident to 
providing donated services to a qualified charitable 
organization--such as out-of-pocket transportation expenses 
necessarily incurred in performing donated services--may 
qualify as a charitable contribution.\212\ No charitable 
contribution deduction is allowed for traveling expenses 
(including expenses for meals and lodging) while away from 
home, whether paid directly or by reimbursement, unless there 
is no significant element of personal pleasure, recreation, or 
vacation in such travel.\213\
---------------------------------------------------------------------------
    \212\Treas. Reg. sec. 1.170A-1(g).
    \213\Sec. 170(j).
---------------------------------------------------------------------------
      In determining the amount treated as a charitable 
contribution where a taxpayer operates a vehicle in providing 
donated services to a charity, the taxpayer either may track 
and deduct actual out-of-pocket expenditures or, in the case of 
a passenger automobile, may use the charitable standard mileage 
rate. The charitable standard mileage rate is set by statute at 
14 cents per mile.\214\ The taxpayer may also deduct (under 
either computation method), any parking fees and tolls incurred 
in rendering the services, but may not deduct any amount 
(regardless of the computation method used) for general repair 
or maintenance expenses, depreciation, insurance, registration 
fees, etc. Regardless of the computation method used, the 
taxpayer must keep reliable written records of expenses 
incurred. For example, where a taxpayer uses the charitable 
standard mileage rate to determine a deduction, the IRS has 
stated that the taxpayer generally must maintain records of 
miles driven, time, place (or use), and purpose of the mileage. 
If the charitable standard mileage rate is not used to 
determine the deduction, the taxpayer generally must maintain 
reliable written records of actual expenses incurred.\215\
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    \214\Sec. 170(i).
    \215\In lieu of actual operating expenses, an optional standard 
mileage rate may be used in computing deductible transportation 
expenses for medical purposes (section 213) or for work-related moving 
(section 217). The standard mileage rates for medical and moving 
purposes generally cover only out-of-pocket operating expenses 
(including gasoline and oil) directly related to the use of the 
automobile. Such rates do not include costs that are not deductible for 
medical or moving purposes, such as general maintenance expenses, 
depreciation, insurance, and registration fees. The medical and moving 
standard mileage rates are determined by the IRS and updated 
periodically. For expenses paid or incurred on or after January 1, 
2017, the rate for both such purposes is 17 cents per mile. IRS Notice 
2016-79.
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Substantiation and other formal requirements
            In general
      A donor who claims a deduction for a charitable 
contribution must maintain reliable written records regarding 
the contribution, regardless of the value or amount of such 
contribution.\216\ In the case of a charitable contribution of 
money, regardless of the amount, applicable recordkeeping 
requirements are satisfied only if the donor maintains as a 
record of the contribution a bank record or a written 
communication from the donee showing the name of the donee 
organization, the date of the contribution, and the amount of 
the contribution. In such cases, the recordkeeping requirements 
may not be satisfied by maintaining other written records.
---------------------------------------------------------------------------
    \216\Sec. 170(f)(17).
---------------------------------------------------------------------------
      No charitable contribution deduction is allowed for a 
separate contribution of $250 or more unless the donor obtains 
a contemporaneous written acknowledgement of the contribution 
from the charity indicating whether the charity provided any 
good or service (and an estimate of the value of any such good 
or service) to the taxpayer in consideration for the 
contribution.\217\
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    \217\Such acknowledgement must include the amount of cash and a 
description (but not value) of any property other than cash 
contributed, whether the donee provided any goods or services in 
consideration for the contribution, and a good faith estimate of the 
value of any such goods or services. Sec. 170(f)(8).
---------------------------------------------------------------------------
      In addition, any charity receiving a contribution 
exceeding $75 made partly as a gift and partly as consideration 
for goods or services furnished by the charity (a ``quid pro 
quo'' contribution) is required to inform the contributor in 
writing of an estimate of the value of the goods or services 
furnished by the charity and that only the portion exceeding 
the value of the goods or services is deductible as a 
charitable contribution.\218\
---------------------------------------------------------------------------
    \218\Sec. 6115.
---------------------------------------------------------------------------
      If the total charitable deduction claimed for noncash 
property is more than $500, the taxpayer must attach a 
completed Form 8283 (Noncash Charitable Contributions) to the 
taxpayer's return or the deduction is not allowed.\219\ In 
general, taxpayers are required to obtain a qualified appraisal 
for donated property with a value of more than $5,000, and to 
attach an appraisal summary to the tax return.
---------------------------------------------------------------------------
    \219\Sec. 170(f)(11).
---------------------------------------------------------------------------
            Exception for certain contributions reported by the donee 
                    organization
      Subsection 170(f)(8)(D) provides an exception to the 
contemporaneous written acknowledgment requirement described 
above. Under the exception, a contemporaneous written 
acknowledgment is not required if the donee organization files 
a return, on such form and in accordance with such regulations 
as the Secretary may prescribe, that includes the same content. 
``[T]he section 170(f)(8)(D) exception is not available unless 
and until the Treasury Department and the IRS issue final 
regulations prescribing the method by which donee reporting may 
be accomplished.''\220\ No such final regulations have been 
issued.\221\
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    \220\See IRS, Notice of Proposed Rulemaking, Substantiation 
Requirement for Certain Contributions, REG-138344-13 (October 13, 
2015), I.R.B. 2015-41 (preamble).
    \221\In October 2015, the IRS issued proposed regulations that, if 
finalized, would have implemented the section 170(f)(8)(D) exception to 
the contemporaneous written acknowledgment requirement. The proposed 
regulations provided that a return filed by a donee organization under 
section 170(f)(8)(D) must include, in addition to the information 
generally required on a contemporaneous written acknowledgment: (1) the 
name and address of the donee organization; (2) the name and address of 
the donor; and (3) the taxpayer identification number of the donor. In 
addition, the return must be filed with the IRS (with a copy provided 
to the donor) on or before February 28 of the year following the 
calendar year in which the contribution was made. Under the proposed 
regulations, donee reporting would have been optional and would have 
been available solely at the discretion of the donee organization. The 
proposed regulations were withdrawn in January 2016. See Prop. Treas. 
Reg. sec 1.170A-13(f)(18).
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                               HOUSE BILL

      The provision makes the following modifications to the 
present law charitable deduction rules.
Increased percentage limit for contributions of cash to public 
        charities
      The provision increases the income-based percentage limit 
described in section 170(b)(1)(A) for certain charitable 
contributions by an individual taxpayer of cash to public 
charities and certain other organizations from 50 percent to 60 
percent.
Charitable mileage rate adjusted for inflation
      The provision repeals the statutory charitable mileage 
rate and provides instead that the standard mileage rate used 
for determining the charitable contribution deduction shall be 
a rate which takes into account the variable costs of operating 
an automobile. The intent of the provision is to allow the IRS 
to determine, and make periodic adjustments to, the charitable 
standard mileage rate, taking into account the types of costs 
that are deductible under section 170 of the Code when 
operating a vehicle in connection with providing volunteer 
services (i.e., generally, the out-of-pocket operating expenses 
(including gasoline and oil) directly related to the use of the 
automobile for such purposes).
Denial of charitable deduction for college athletic event seating 
        rights
      The provision amends section 170(l) to provide that no 
charitable deduction shall be allowed for any amount described 
in paragraph 170(l)(2), generally, a payment to an institution 
of higher education in exchange for which the payor receives 
the right to purchase tickets or seating at an athletic event, 
as described in greater detail above.
Repeal of substantiation exception for certain contributions reported 
        by the donee organization
      The provision repeals the section 170(f)(8)(D) exception 
to the contemporaneous written acknowledgment requirement.
      Effective date.--The provision is effective for 
contributions made in taxable years beginning after December 
31, 2017.

                            SENATE AMENDMENT

      The Senate amendment includes three of the House bill's 
four modifications to the present-law charitable contribution 
rules: (1) the increase in the percentage limit for charitable 
contributions of cash to public charities; (2) the denial of a 
charitable deduction for payments made in exchange for college 
athletic event seating rights; and (3) the repeal of the 
substantiation exception for certain contributions reported by 
the donee organization.
      The Senate amendment does not include the provision from 
the House bill that allows the charitable standard mileage rate 
to be adjusted for inflation.
      Effective date.--The provisions that increase the 
charitable contribution percentage limit and deny a deduction 
for stadium seating payments are effective for contributions 
made in taxable years beginning after December 31, 2017. The 
provision that repeals the substantiation exception for certain 
contributions reported by the donee organization is effective 
for contributions made in taxable years beginning after 
December 31, 2016.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
6. Repeal of Certain Miscellaneous Itemized Deductions Subject to the 
        Two-Percent Floor (secs. 1307 and 1312 of the House bill, sec. 
        11045 of the Senate amendment, and secs. 62, 67 and 212 of the 
        Code)

                              PRESENT LAW

      Individuals may claim itemized deductions for certain 
miscellaneous expenses. Certain of these expenses are not 
deductible unless, in aggregate, they exceed two percent of the 
taxpayer's adjusted gross income (``AGI'').\222\ The deductions 
described below are subject to the aggregate two-percent 
floor.\223\
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    \222\Sec. 67(a).
    \223\The miscellaneous itemized deduction for tax preparation 
expenses is described in a separate section of this document.
---------------------------------------------------------------------------
Expenses for the production or collection of income
      Individuals may deduct all ordinary and necessary 
expenses paid or incurred during the taxable year for the 
production or collection of income.\224\
---------------------------------------------------------------------------
    \224\Sec. 212(1).
---------------------------------------------------------------------------
      Present law and IRS guidance provide examples of items 
that may be deducted under this provision. This non-exhaustive 
list includes:\225\
---------------------------------------------------------------------------
    \225\See IRS Publication 529, ``Miscellaneous Deductions'' (2016), 
p. 9.
---------------------------------------------------------------------------
             Appraisal fees for a casualty loss or 
        charitable contribution;
             Casualty and theft losses from property 
        used in performing services as an employee;
             Clerical help and office rent in caring 
        for investments;
             Depreciation on home computers used for 
        investments;
             Excess deductions (including 
        administrative expenses) allowed a beneficiary on 
        termination of an estate or trust;
             Fees to collect interest and dividends;
             Hobby expenses, but generally not more 
        than hobby income;
             Indirect miscellaneous deductions from 
        pass-through entities;
             Investment fees and expenses;
             Loss on deposits in an insolvent or 
        bankrupt financial institution;
             Loss on traditional IRAs or Roth IRAs, 
        when all amounts have been distributed;
             Repayments of income;
             Safe deposit box rental fees, except for 
        storing jewelry and other personal effects;
             Service charges on dividend reinvestment 
        plans; and
             Trustee's fees for an IRA, if separately 
        billed and paid.
Tax preparation expenses
      For regular income tax purposes, individuals are allowed 
an itemized deduction for expenses for the production of 
income. These expenses are defined as ordinary and necessary 
expenses paid or incurred in a taxable year: (1) for the 
production or collection of income; (2) for the management, 
conservation, or maintenance of property held for the 
production of income; or (3) in connection with the 
determination, collection, or refund of any tax.\226\
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    \226\Sec. 212.
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Unreimbursed expenses attributable to the trade or business of being an 
        employee
      In general, unreimbursed business expenses incurred by an 
employee are deductible, but only as an itemized deduction and 
only to the extent the expenses exceed two percent of adjusted 
gross income.\227\
---------------------------------------------------------------------------
    \227\Secs. 62(a)(1) and 67.
---------------------------------------------------------------------------
      Present law and IRS guidance provide examples of items 
that may be deducted under this provision. This non-exhaustive 
list includes:\228\
---------------------------------------------------------------------------
    \228\See IRS Publication 529, ``Miscellaneous Deductions'' (2016), 
p. 3.
---------------------------------------------------------------------------
             Business bad debt of an employee;
             Business liability insurance premiums;
             Damages paid to a former employer for 
        breach of an employment contract;
             Depreciation on a computer a taxpayer's 
        employer requires him to use in his work;
             Dues to a chamber of commerce if 
        membership helps the taxpayer perform his job;
             Dues to professional societies;
             Educator expenses;\229\
---------------------------------------------------------------------------
    \229\Under a special provision, these expenses are deductible 
``above the line'' up to $250.
---------------------------------------------------------------------------
             Home office or part of a taxpayer's home 
        used regularly and exclusively in the taxpayer's work;
             Job search expenses in the taxpayer's 
        present occupation;
             Laboratory breakage fees;
             Legal fees related to the taxpayer's job;
             Licenses and regulatory fees;
             Malpractice insurance premiums;
             Medical examinations required by an 
        employer;
             Occupational taxes;
             Passport fees for a business trip;
             Repayment of an income aid payment 
        received under an employer's plan;
             Research expenses of a college professor;
             Rural mail carriers' vehicle expenses;
             Subscriptions to professional journals and 
        trade magazines related to the taxpayer's work;
             Tools and supplies used in the taxpayer's 
        work;
             Purchase of travel, transportation, meals, 
        entertainment, gifts, and local lodging related to the 
        taxpayer's work;
             Union dues and expenses;
             Work clothes and uniforms if required and 
        not suitable for everyday use; and
             Work-related education.
Other miscellaneous itemized deductions subject to the two-percent 
        floor
      Other miscellaneous itemized deductions subject to the 
two-percent floor include:
             Repayments of income received under a 
        claim of right (only subject to the two-percent floor 
        if less than $3,000);
             Repayments of Social Security benefits; 
        and
             The share of deductible investment 
        expenses from pass-through entities.

                               HOUSE BILL

      The House bill repeals the deduction for expenses in 
connection with the determination, collection, or refund of any 
tax.
      Under the provision, business expenses incurred by an 
employee are not deductible, other than expenses that are 
deductible in determining adjusted gross income (that is, 
above-the-line deductions).
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment suspends all miscellaneous itemized 
deductions that are subject to the two-percent floor under 
present law. Thus, under the provision, taxpayers may not claim 
the above-listed items as itemized deductions for the taxable 
years to which the suspension applies. The provision does not 
apply for taxable years beginning after December 31, 2025.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
7. Repeal of deduction for medical expenses (sec. 1308 of the House 
        bill, sec. 11028 of the Senate amendment and sec. 213 of the 
        Code)

                              PRESENT LAW

      Individuals may claim an itemized deduction for 
unreimbursed medical expenses, but only to the extent that such 
expenses exceed 10 percent of adjusted gross income.\230\ For 
taxable years beginning before January 1, 2017, the 10-percent 
threshold is reduced to 7.5 percent in the case of taxpayers 
who have attained the age of 65 before the close of the taxable 
year. In the case of married taxpayers, the 7.5 percent 
threshold applies if either spouse has obtained the age of 65 
before the close of the taxable year. For these taxpayers, 
during these years, the threshold is 10 percent for AMT 
purposes.
---------------------------------------------------------------------------
    \230\Sec. 213. The threshold was amended by the Patient Protection 
and Affordable Care Act (Pub. L. No. 111-118). For taxable years 
beginning before January 1, 2013, the threshold was 7.5 percent and 10 
percent for alternative minimum tax (``AMT'') purposes.
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill repeals the deduction for unreimbursed 
medical expenses.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment provides that, for taxable years 
beginning after December 31, 2016 and ending before January 1, 
2019, the threshold for deducting medical expenses shall be 
7.5-percent for all taxpayers. For these years, this threshold 
applies for purposes of the AMT in addition to the regular tax.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2016.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
8. Repeal of deduction for alimony payments and corresponding inclusion 
        in gross income (sec. 1309 of the House bill and secs. 61, 71, 
        and 215 of the Code)

                              PRESENT LAW

      Alimony and separate maintenance payments are deductible 
by the payor spouse and includible in income by the recipient 
spouse.\231\ Child support payments are not treated as 
alimony.\232\
---------------------------------------------------------------------------
    \231\Secs. 215(a), 61(a)(8) and 71(a).
    \232\Sec. 71(c).
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the House bill, alimony and separate maintenance 
payments are not deductible by the payor spouse. The House bill 
repeals the Code provisions that specify that alimony and 
separate maintenance payments are included in income. Thus, the 
intent of the provision is to follow the rule of the United 
States Supreme Court's holding in Gould v. Gould,\233\ in which 
the Court held that such payments are not income to the 
recipient. Income used for alimony payments is taxed at the 
rates applicable to the payor spouse rather than the recipient 
spouse. The treatment of child support is not changed.
---------------------------------------------------------------------------
    \233\245 U.S. 151 (1917).
---------------------------------------------------------------------------
      Effective date.--The provision is effective for any 
divorce or separation instrument executed after December 31, 
2017, or for any divorce or separation instrument executed on 
or before December 31, 2017, and modified after that date, if 
the modification expressly provides that the amendments made by 
this section apply to such modification.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement generally follows the House 
bill. However, the conference agreement delays the effective 
date of the provision by one year. Thus, the conference 
agreement is effective for any divorce or separation instrument 
executed after December 31, 2018, or for any divorce or 
separation instrument executed on or before December 31, 2018, 
and modified after that date, if the modification expressly 
provides that the amendments made by this section apply to such 
modification.
9. Repeal of deduction for moving expenses (sec. 1310 of the House 
        bill, sec. 11050 of the Senate amendment, and sec. 217 of the 
        Code)

                              PRESENT LAW

      Individuals are permitted an above-the-line deduction for 
moving expenses paid or incurred during the taxable year in 
connection with the commencement of work by the taxpayer as an 
employee or as a self-employed individual at a new principal 
place of work.\234\ Such expenses are deductible only if the 
move meets certain conditions related to distance from the 
taxpayer's previous residence and the taxpayer's status as a 
full-time employee in the new location.
---------------------------------------------------------------------------
    \234\Sec. 217(a).
---------------------------------------------------------------------------
      Special rules apply in the case of a member of the Armed 
Forces of the United States. In the case of any such individual 
who is on active duty, who moves pursuant to a military order 
and incident to a permanent change of station, the limitations 
related to distance from the taxpayer's previous residence and 
status as a full-time employee in the new location do not 
apply.\235\ Additionally, any moving and storage expenses which 
are furnished in kind to such an individual, spouse, or 
dependents, or if such expenses are reimbursed or an allowance 
for such expenses is provided, such amounts are excluded from 
gross income.\236\ Rules also apply to exclude amounts 
furnished to the spouse and dependents of such an individual in 
the event that such individuals move to a location other than 
to where the member of the Armed Forces is moving.
---------------------------------------------------------------------------
    \235\Sec. 217(g).
    \236\Sec. 217(g)(2).
---------------------------------------------------------------------------
      Present law provides income exclusions for various 
benefits provided to members of the Armed Forces.\237\
---------------------------------------------------------------------------
    \237\Sec. 134.
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill generally repeals the deduction for moving 
expenses. The provision intends to retain tax benefits for the 
moving expenses of members of the Armed Forces of the United 
States.\238\ Thus, the provision retains the special rules 
under present law that provide an exclusion for amounts 
attributable to in-kind moving and storage expenses (and 
reimbursements or allowances for these expenses) for members of 
the Armed Forces (or their spouse or dependents) on active duty 
that move pursuant to a military order and incident to a 
permanent change of station.\239\
---------------------------------------------------------------------------
    \238\A technical amendment may be needed to reflect this intent for 
the deduction for moving expenses for members of the Armed Forces.
    \239\Under the provision, these exclusions are added to section 
134.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment generally suspends the deduction for 
moving expenses for taxable years 2018 through 2025. However, 
during that suspension period, the provision retains the 
deduction for moving expenses and the rules providing for 
exclusions of amounts attributable to in-kind moving and 
storage expenses (and reimbursements or allowances for these 
expenses) for members of the Armed Forces (or their spouse or 
dependents) on active duty that move pursuant to a military 
order and incident to a permanent change of station.
      The suspension of the deduction for moving expenses does 
not apply to taxable years beginning after December 31, 2025.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
10. Termination of deduction and exclusions for contributions to 
        medical savings accounts (sec. 1311 of the House bill, secs. 
        106(b) and 220 of the Code)

                              PRESENT LAW

Archer MSAs
      As of 1997, certain individuals are permitted to 
contribute to an Archer MSA, which is a tax-exempt trust or 
custodial account.\240\ Within limits, contributions to an 
Archer MSA are deductible in determining adjusted gross income 
if made by an individual and are excludible from gross income 
for income tax purposes and wages for employment tax\241\ 
purposes if made by the employer of an individual.\242\
---------------------------------------------------------------------------
    \240\Archer MSAs were originally called medical savings accounts or 
MSAs.
    \241\The FICA exclusion is provided under IRS Notice 96-53.
    \242\Sections 106(b) and 220.
---------------------------------------------------------------------------
      An individual is generally eligible for an Archer MSA if 
the individual is covered by a high deductible health plan and 
no other health plan other than a plan that provides certain 
permitted insurance or permitted coverage. In addition, the 
individual either must be an employee of a small employer 
(generally an employer with 50 or fewer employees on average) 
that provides the high deductible health plan or must be self-
employed or the spouse of a self-employed individual and the 
high deductible health plan is not provided by the employer of 
the individual or spouse.
      For 2017, a high deductible health plan for purposes of 
Archer MSA eligibility is a health plan with an annual 
deductible of at least $2,250 and not more than $3,350 in the 
case of self-only coverage and at least $4,500 and not more 
than $6,750 in the case of family coverage. In addition, for 
2017, the maximum out-of-pocket expenses with respect to 
allowed costs must be no more than $4,500 in the case of self-
only coverage and no more than $8,250 in the case of family 
coverage. Out-of-pocket expenses include deductibles, co-
payments, and other amounts (other than premiums) that the 
individual must pay for covered benefits under the plan. A plan 
does not fail to qualify as a high deductible health plan if 
substantially all of the coverage under the plan is certain 
permitted insurance or is coverage (whether provided through 
insurance or otherwise) for accidents, disability, dental care, 
vision care, or long-term care.
      The maximum annual contribution that can be made to an 
Archer MSA for a year is 65 percent of the annual deductible 
under the individual's high deductible health plan in the case 
of self-only coverage (65 percent of $3,350 for 2017) and 75 
percent of the annual deductible in the case of family coverage 
(75 percent of $6,750 for 2017), but in no case more than the 
individual's compensation income. In addition, the maximum 
contribution can be made only if the individual is covered by 
the high deductible health plan for the full year.
      Distributions from an Archer MSA for qualified medical 
expenses are not includible in gross income. Distributions not 
used for qualified medical expenses are includible in gross 
income and subject to an additional 20-percent tax unless an 
exception applies. A distribution from an Archer MSA may be 
rolled over on a nontaxable basis to another Archer MSA or to a 
health savings account and does not count against the 
contribution limits.
      After 2007, no new contributions can be made to Archer 
MSAs except by or on behalf of individuals who previously had 
made Archer MSA contributions and employees of small employers 
that previously contributed to Archer MSAs (or at least 20 
percent of whose employees who were previously eligible to 
contribute to Archer MSAs did so).
Health savings accounts
      As of 2004, an individual with a high deductible health 
plan (and no other health plan other than a plan that provides 
certain permitted insurance or permitted coverage) generally 
may contribute to a health savings account (``HSA''), which is 
a tax-exempt trust or custodial account. HSAs provide similar 
tax-favored savings treatment as Archer MSAs. That is, within 
limits, contributions to an HSA are deductible in determining 
adjusted gross income if made by an individual and are 
excludable from gross income for income tax purposes and wages 
for employment tax\243\ purposes if made by the employer of an 
individual, and distributions for qualified medical expenses 
are not includible in gross income.\244\ However, the rules for 
HSAs are in various aspects more favorable than the rules for 
Archer MSAs. For example, the availability of HSAs is not 
limited to employees of small employers or self-employed 
individuals and their spouses.
---------------------------------------------------------------------------
    \243\The FICA exclusion is provided under IRS Notice 2004-2.
    \244\Secs. 106(d) and 223.
---------------------------------------------------------------------------
      For 2017, a high deductible health plan for purposes of 
HSA eligibility is a health plan with an annual deductible of 
at least $1,300 in the case of self-only coverage and at least 
$2,600 in the case of family coverage. In addition, for 2017, 
the sum of the deductible and the maximum out-of-pocket 
expenses with respect to allowed costs must be no more than 
$6,550 in the case of self-only coverage and no more than 
$13,100 in the case of family coverage. A plan does not fail to 
qualify as a high deductible health plan for HSA purposes 
merely because it does not have a deductible for preventive 
care.
      For 2017, the maximum aggregate annual contribution that 
can be made to an HSA is $3,400 in the case of self-only 
coverage and $6,750 in the case of family coverage. The annual 
contribution limits are increased by $1,000 for individuals who 
have attained age 55 by the end of the taxable year (referred 
to as ``catch-up contributions''). The maximum amount that an 
individual may contribute is reduced by the amount of any 
contributions to the individual's Archer MSA and any excludable 
HSA contributions made by the individual's employer. In some 
cases, an individual may make the maximum HSA contribution, 
even if the individual is covered by the high deductible health 
plan for only part of the year. A distribution from an HSA may 
be rolled over on a nontaxable basis to another HSA and does 
not count against the contribution limits.

                               HOUSE BILL

      Under the provision, contributions to Archer MSAs for 
taxable years beginning after December 31, 2017, are not 
deductible or excludible from gross income and wages.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the House bill 
provision.
11. Denial of deduction for performing artists and certain officials; 
        Modification of deduction for educator expenses (sec. 1312 of 
        the House bill, sec. 11032 of the Senate amendment and sec. 62 
        of the Code)

                              PRESENT LAW

      In general, unreimbursed business expenses incurred by an 
employee are deductible, but only as an itemized deduction and 
only to the extent the expenses exceed two percent of adjusted 
gross income.\245\ However, in the case of certain employees 
and certain expenses, a deduction may be taken in determining 
adjusted gross income (referred to as an ``above-the-line'' 
deduction), including expenses of qualified performing artists, 
expenses of State or local government officials performing 
services on a fee basis, and expenses of eligible 
educators.\246\
---------------------------------------------------------------------------
    \245\Secs. 62(a)(1) and 67.
    \246\Sec. 62(a)(2)(B), (C), and (D). Under section 62(a)(2)(A) and 
(C), certain reimbursements of employee business expenses are excluded 
from income. Under section 62(a)(2)(E), an above-the-line deduction 
applies to expenses of members of a reserve component of the Armed 
Forces.
---------------------------------------------------------------------------
      Eligible educators are elementary or secondary school 
teachers, instructors, counselors, principals, or aides in a 
school for at least 900 hours during a school year.\247\ An 
eligible educator may take an ``above-the-line'' deduction for 
ordinary and necessary expenses incurred (1) by reason of 
participation in professional development courses related to 
the curriculum or students the educator teaches, or (2) in 
connection with books, supplies, computer and other equipment, 
and supplementary materials to be used in the classroom. The 
deduction may not exceed $250 (for 2017) in expenses, and is 
indexed for inflation.
---------------------------------------------------------------------------
    \247\Sec. 62(d)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill repeals the present-law provisions 
allowing for above-the-line deductions for expenses of 
qualified performing artists, expenses of State or local 
government officials performing services on a fee basis, and 
expenses of eligible educators.\248\
---------------------------------------------------------------------------
    \248\The provision retains the present-law provisions under which 
certain reimbursements of employee business expenses are excluded from 
income and under which an above-the-line deduction applies to expenses 
of members of a reserve component of the Armed Forces.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment temporarily increases the limit for 
the deduction of certain expenses of eligible educators, in 
determining adjusted gross income, to $500. Any deduction for 
expenses in excess of this amount (under present law generally 
a miscellaneous itemized deduction subject to the two-percent 
floor) is suspended.\249\
---------------------------------------------------------------------------
    \249\Sec. 11045 of the Senate amendment.
---------------------------------------------------------------------------
      The provision does not apply to taxable years beginning 
after December 31, 2025.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision and retains the 
present-law above-the-line deduction and limit for certain 
expenses of eligible educators.
12. Suspension of exclusion for qualified bicycle commuting 
        reimbursement (sec. 11048 of the Senate amendment and sec. 
        132(f) of the Code)

                              PRESENT LAW

      Qualified bicycle commuting reimbursements of up to $20 
per qualifying bicycle commuting month are excludible from an 
employee's gross income.\250\ A qualifying bicycle commuting 
month is any month during which the employee regularly uses the 
bicycle for a substantial portion of travel to a place of 
employment and during which the employee does not receive 
transportation in a commuter highway vehicle, a transit pass, 
or qualified parking from an employer.
---------------------------------------------------------------------------
    \250\Section 132(a)(5) and 132(f)(1)(D).
---------------------------------------------------------------------------
      Qualified reimbursements are any amount received from an 
employer during a 15-month period beginning with the first day 
of the calendar year as payment for reasonable expenses during 
a calendar year. Reasonable expenses are those incurred in a 
calendar year for the purchase of a bicycle and bicycle 
improvements, repair, and storage, if the bicycle is regularly 
used for travel between the employee's residence and place of 
employment.
      Amounts that are excludible from gross income for income 
tax purposes are also excluded from wages for employment tax 
purposes.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision suspends the exclusion from gross income 
and wages for qualified bicycle commuting reimbursements. The 
exclusion does not apply to taxable years beginning after 
December 31, 2017 and before January 1, 2026.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
13. Limitation on exclusion for employer-provided housing (sec. 1401 of 
        the House bill and sec. 119 of the Code)

                              PRESENT LAW

      The value of lodging furnished to an employee, spouse, or 
dependents by or on behalf of an employer for the convenience 
of the employer (referred to as ``employer-provided lodging'') 
is excludible from the employee's gross income, but only if the 
employee is required to accept the lodging on the business 
premises of the employer as a condition of employment.\251\ 
Special rules apply with respect to employees living in foreign 
camps\252\ and lodging furnished by certain educational 
institutions to employees.\253\ Amounts attributable to 
employer-provided lodging that are excludible from gross income 
for income tax purposes are also excluded from wages for 
employment tax purposes.
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    \251\Sec. 119(a).
    \252\Sec. 119(c).
    \253\Sec. 119(d).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision limits the amount that may be excluded from 
gross income for employer-provided lodging to $50,000 ($25,000 
in the case of a married individual filing a separate return), 
subject to a phase-out based on the employee's level of 
compensation. The exclusion is phased out by $1 for every $2 
earned above the indexed compensation threshold. For 2017, this 
compensation threshold is $120,000.\254\ The provision also 
denies any exclusion for employer-provided housing provided to 
5% owners,\255\ regardless of their compensation level.
---------------------------------------------------------------------------
    \254\The compensation threshold is that amount in effect under 
section 414(q)(1)(B)(i).
    \255\As defined in section 416(i)(1)(B)(i).
---------------------------------------------------------------------------
      In addition, the exclusion does not apply to more than 
one residence at any given time. In the case of spouses filing 
a joint return, the one residence limit may be applied 
separately to each spouse for a period during which the spouses 
reside in separate residences provided in connection with their 
respective employments.
      Those amounts that are not excludible from gross income 
for income tax purposes will also not be excluded from wages 
for employment tax purposes.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
14. Modification of exclusion of gain on sale of a principal residence 
        (sec. 1402 of the House bill, sec. 11047 of the Senate 
        amendment, and sec. 121 of the Code)

                              PRESENT LAW

      A taxpayer who is an individual may exclude up to 
$250,000 ($500,000 if married filing a joint return) of gain 
realized on the sale or exchange of a principal residence. To 
be eligible for the exclusion, the taxpayer must have owned and 
used the residence as a principal residence for at least two of 
the five years ending on the date of the sale or exchange. A 
taxpayer who fails to meet these requirements by reason of a 
change of place of employment, health, or, to the extent 
provided under regulations, unforeseen circumstances, is able 
to exclude an amount equal to the fraction of the $250,000 
($500,000 if married filing a joint return) that is equal to 
the fraction of the two years that the ownership and use 
requirements are met.
      The exclusion under this provision may not be claimed for 
more than one sale or exchange during any two-year period.

                               HOUSE BILL

      The provision extends the length of time a taxpayer must 
own and use a residence to qualify for this exclusion. 
Specifically, the exclusion is available only if the taxpayer 
has owned and used the residence as a principal residence for 
at least five of the eight years ending on the date of the sale 
or exchange. A taxpayer who fails to meet these requirements by 
reason of a change of place of employment, health, or, to the 
extent provided under regulations, unforeseen circumstances, is 
able to exclude an amount equal to the fraction of the $250,000 
($500,000 if married filing a joint return) that is equal to 
the fraction of the five years that the ownership and use 
requirements are met.
      The provision limits the exclusion so that the exclusion 
may not apply to more than one sale or exchange during any 
five-year period.
      The provision phases-out the exclusion by one dollar for 
every dollar a taxpayer's AGI exceeds $250,000 ($500,000 if 
married filing a joint return). For purposes of this provision, 
AGI is measured using the average of the taxpayer's AGI in the 
year of sale (excluding any income from the sale of the home) 
and the prior two taxable years before the sale.
      Effective date.--The provision is effective for sales and 
exchanges after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment generally follows the House bill, 
but does not include the provision that phases out the 
exclusion for AGI in excess of $250,000 ($500,000 if married 
filing a joint return). The Senate amendment does not apply to 
taxable years beginning after December 31, 2025.
      Effective date.--The provision is effective for sales and 
exchanges after December 31, 2017.

                          CONFERENCE AGREEMENT

      No provision.
15. Sunset of exclusion for dependent care assistance programs (sec. 
        1404 of the House bill and sec. 129 of the Code)

                              PRESENT LAW

      An exclusion from the gross income of an employee of up 
to $5,000 annually for employer-provided dependent care 
assistance\256\ is allowed if the assistance is provided 
pursuant to a separate written plan of an employer that does 
not discriminate in favor of highly compensated employees\257\ 
and meets certain other requirements. The amount excludible 
cannot exceed the earned income of the employee or, if the 
employee is married, the lesser of the earned income of the 
employee or the earned income of the employee's spouse. Amounts 
attributable to dependent care assistance that are excludible 
from gross income for income tax purposes are also excludible 
from wages for employment tax purposes.
---------------------------------------------------------------------------
    \256\Sec. 129(a).
    \257\Section 129(d). The exclusion applies if the contributions or 
benefits under the program do not discriminate in favor of highly 
compensated employees, within the meaning of Sec. 414(q), or their 
dependents, and the program benefits employees under a classification 
established by the employer found not to be discriminatory in favor or 
such highly compensated employees or their dependents.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision repeals the deduction for qualified tuition 
and related expenses.
      Effective date.--The provision terminates the exclusions 
from gross income and wages for dependent care assistance 
programs for taxable years beginning after December 31, 2022.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
16. Repeal of exclusion for qualified moving expense reimbursement 
        (sec. 1405 of the House bill, sec. 11049 of the Senate 
        amendment, and sec. 132(g) of the Code)

                              PRESENT LAW

      Qualified moving expense reimbursements are excluded from 
an employee's gross income,\258\ and are defined as any amount 
received (directly or indirectly) from an employer as payment 
for (or reimbursement of) expenses which would be deductible as 
moving expenses under section 217\259\ if directly paid or 
incurred by the employee. However, any such amount actually 
deducted by the individual is not eligible for this exclusion. 
Amounts that are excludible from gross income for income tax 
purposes are also excluded from wages for employment tax 
purposes.
---------------------------------------------------------------------------
    \258\Secs. 132(a)(6) and 132(g).
    \259\Individuals are allowed an itemized deduction for moving 
expenses paid or incurred during the taxable year in connection with 
the commencement of work by the taxpayer as an employee or as a self-
employed individual at a new principal place of work.\259\ Such 
expenses are deductible only if the move meets certain conditions 
related to distance from the taxpayer's previous residence and the 
taxpayer's status as a full-time employee in the new location.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision repeals the exclusion from gross income and 
wages for qualified moving expense reimbursements except in the 
case of a member of the Armed Forces of the United States on 
active duty who moves pursuant to a military order.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill except 
that the exclusion does not apply to taxable years beginning 
after December 31, 2017 and before January 1, 2026.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
17. Repeal of exclusion for adoption assistance programs (sec. 1406 of 
        the House bill and sec. 137 of the Code)

                              PRESENT LAW

      An exclusion from an employee's gross income is allowed 
for qualified adoption expenses paid or reimbursed by an 
employer, if such amounts are furnished pursuant to an adoption 
assistance program.\260\ For 2017, the maximum exclusion amount 
is $13,570, and is phased out ratably for taxpayers with 
modified adjusted gross income (``AGI'') above a certain 
amount. In 2017, the phase out range begins at modified AGI of 
$203,540, with no exclusion when modified AGI equals or exceeds 
$243,540. Modified AGI is the sum of the taxpayer's AGI plus 
amounts excluded from income under sections 911, 931, and 933 
(relating to the exclusion of income of U.S. citizens or 
residents living abroad; residents of Guam, American Samoa, and 
the Northern Mariana Islands and residents of Puerto Rico, 
respectively).
---------------------------------------------------------------------------
    \260\Sec. 137(a).
---------------------------------------------------------------------------
      In the case of adoption of a child with special needs 
that is finalized during a taxable year, the taxpayer may claim 
as an exclusion the amount of the maximum exclusion minus the 
aggregate qualified adoption expenses with respect to that 
adoption for all prior taxable years.
      Qualified adoption expenses are reasonable and necessary 
adoption fees, court costs, attorney fees, and other expenses 
that are: (1) directly related to, and the principal purpose of 
which is for, the legal adoption of an eligible child by the 
taxpayer; (2) not incurred in violation of State or Federal 
law, or in carrying out any surrogate parenting arrangement; 
(3) not for the adoption of the child of the taxpayer's spouse; 
and (4) not reimbursed (e.g., by an employer).\261\
---------------------------------------------------------------------------
    \261\Sec. 23(d)(1).
---------------------------------------------------------------------------
      For the exclusion to apply, certain requirements must be 
satisfied, including satisfaction of nondiscrimination rules 
and providing employees with reasonable notification of the 
availability and terms of the program.\262\
---------------------------------------------------------------------------
    \262\The employer's adoption assistance program must not 
discriminate in favor of highly compensated employees, within the 
meaning of Sec. 414(q). In addition, no more than five percent of the 
amounts paid or incurred by the employer during the year for qualified 
adoption expenses under an adoption assistance program can be provided 
for the class of individuals consisting of more-than-five-percent 
owners of the employer and the spouses or dependents of such more-than-
five-percent owners.
---------------------------------------------------------------------------
      Adoption expenses paid or reimbursed by the employer 
under an adoption assistance program are not eligible for the 
adoption credit under section 23. A taxpayer may be eligible 
for the adoption credit (with respect to qualified adoption 
expenses he or she incurs) and also for the exclusion (with 
respect to different qualified adoption expenses paid or 
reimbursed by his or her employer).

                               HOUSE BILL

      The provision repeals the exclusion from gross income for 
adoption assistance programs.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.

     E. Simplification and Reform of Savings, Pensions, Retirement

1. Repeal of special rule permitting recharacterization of IRA 
        contributions (sec. 1501 of the House bill, sec. 13611 of the 
        Senate amendment, and sec. 408A of the Code)

                              PRESENT LAW

Individual retirement arrangements
      There are two basic types of individual retirement 
arrangements (``IRAs'') under present law: traditional 
IRAs,\263\ to which both deductible and nondeductible 
contributions may be made,\264\ and Roth IRAs, to which only 
nondeductible contributions may be made.\265\ The principal 
difference between these two types of IRAs is the timing of 
income tax inclusion.
---------------------------------------------------------------------------
    \263\Sec. 408.
    \264\Secs. 219(a) and 408(o).
    \265\Sec. 408A.
---------------------------------------------------------------------------
      An annual limit applies to contributions to IRAs. The 
contribution limit is coordinated so that the aggregate maximum 
amount that can be contributed to all of an individual's IRAs 
(both traditional and Roth) for a taxable year is the lesser of 
a certain dollar amount ($5,500 for 2017) or the individual's 
compensation. In the case of a married couple, contributions 
can be made up to the dollar limit for each spouse if the 
combined compensation of the spouses is at least equal to the 
contributed amount. The dollar limit is increased annually 
(``indexed'') as needed to reflect increases in the cost of 
living. An individual who has attained age 50 before the end of 
the taxable year may also make catch-up contributions up to 
$1,000 to an IRA. The IRA catch-up contribution limit is not 
indexed.
Traditional IRAs
      An individual may make deductible contributions to a 
traditional IRA up to the IRA contribution limit (reduced by 
any contributions to Roth IRAs) if neither the individual nor 
the individual's spouse is an active participant in an 
employer-sponsored retirement plan. If an individual (or the 
individual's spouse) is an active participant in an employer-
sponsored retirement plan, the deduction is phased out for 
taxpayers with adjusted gross income (``AGI'') for the taxable 
year over certain indexed levels.\266\ To the extent an 
individual cannot or does not make deductible contributions to 
a traditional IRA or contributions to a Roth IRA for the 
taxable year, the individual may make nondeductible after-tax 
contributions to a traditional IRA (that is, no AGI limits 
apply), subject to the same contribution limits as the limits 
on deductible contributions, including catch-up contributions. 
An individual who has attained age 70\1/2\ before the close of 
a year is not permitted to make contributions to a traditional 
IRA for that year.
---------------------------------------------------------------------------
    \266\Sec. 219(g).
---------------------------------------------------------------------------
      Amounts held in a traditional IRA are includible in 
income when withdrawn, except to the extent the withdrawal is a 
return of the individual's basis.\267\ All traditional IRAs of 
an individual are treated as a single contract for purposes of 
recovering basis in the IRAs.
---------------------------------------------------------------------------
    \267\Basis results from after-tax contributions to traditional IRAs 
or rollovers to traditional IRAs of after-tax amounts from another 
eligible retirement plan.
---------------------------------------------------------------------------
Roth IRAs
      Individuals with AGI below certain levels may make 
nondeductible contributions to a Roth IRA. The maximum annual 
contribution that can be made to a Roth IRA is phased out for 
taxpayers with AGI for the taxable year over certain indexed 
levels.\268\
---------------------------------------------------------------------------
    \268\Although an individual with AGI exceeding certain limits is 
not permitted to make a contribution directly to a Roth IRA, the 
individual can make a contribution to a traditional IRA and convert the 
traditional IRA to a Roth IRA, as discussed below.
---------------------------------------------------------------------------
      Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includible in income. A 
qualified distribution is a distribution that (1) is made after 
the five-taxable-year period beginning with the first taxable 
year for which the individual first made a contribution to a 
Roth IRA, and (2) is made after attainment of age 59\1/2\, on 
account of death or disability, or is made for first-time 
homebuyer expenses of up to $10,000.
      Distributions from a Roth IRA that are not qualified 
distributions are includible in income to the extent 
attributable to earnings; amounts that are attributable to a 
return of contributions to the Roth IRA are not includible in 
income. All Roth IRAs are treated as a single contract for 
purposes of determining the amount that is a return of 
contributions.
Separation of traditional and Roth IRA accounts
      Contributions to traditional IRAs and to Roth IRAs must 
be segregated into separate IRAs, meaning arrangements with 
separate trusts, accounts, or contracts, and separate IRA 
documents. Except in the case of a conversion or 
recharacterization, amounts cannot be transferred or rolled 
over between the two types of IRAs.
      Taxpayers generally may convert an amount in a 
traditional IRA to a Roth IRA.\269\ The amount converted is 
includible in the taxpayer's income as if a withdrawal had been 
made.\270\ The conversion is accomplished by a trustee-to-
trustee transfer of the amount from the traditional IRA to the 
Roth IRA, or by a distribution from the traditional IRA and 
contribution to the Roth IRA within 60 days.
---------------------------------------------------------------------------
    \269\Although an individual with AGI exceeding certain limits is 
not permitted to make a contribution directly to a Roth IRA, the 
individual can make a contribution to a traditional IRA and convert the 
traditional IRA to a Roth IRA.
    \270\Subject to various exceptions, distributions from an IRA 
before age 59\1/2\ that are includible in income are subject to a 10-
percent early distribution tax under section 72(t). An exception 
applies to an amount includible in income as a result of the conversion 
from a traditional IRA into a Roth IRA. However, the early distribution 
tax applies if the taxpayer withdraws the amount within five years of 
the conversion.
---------------------------------------------------------------------------
      Rollovers to IRAs of distributions from tax-favored 
employer-sponsored retirement plans (that is, qualified 
retirement plans, tax-deferred annuity plans, and governmental 
eligible deferred compensation plans\271\) are also permitted. 
For tax-free rollovers, distributions from pretax accounts 
under an employer-sponsored plan generally must be contributed 
to a traditional IRA, and distributions from a designated Roth 
account under an employer-sponsored plan must be contributed 
only to a Roth IRA. However, a distribution from an employer-
sponsored plan that is not from a designated Roth account is 
also permitted to be rolled over into a Roth IRA, subject to 
the rules that apply to conversions from a traditional IRA into 
a Roth IRA. Thus, a rollover from a tax-favored employer-
sponsored plan to a Roth IRA is includible in gross income 
(except to the extent it represents a return of after-tax 
contributions).\272\
---------------------------------------------------------------------------
    \271\ Secs. 401(a), 403(a), 403(b) and 457(b).
    \272\ As in the case of a conversion of an amount from a 
traditional IRA to a Roth IRA, the special recapture rule relating to 
the 10-percent additional tax on early distributions applies for 
distributions made from the Roth IRA within a specified five-year 
period after the rollover.
---------------------------------------------------------------------------
Recharacterization of IRA contributions
      If an individual makes a contribution to an IRA 
(traditional or Roth) for a taxable year, the individual is 
permitted to recharacterize the contribution as a contribution 
to the other type of IRA (traditional or Roth) by making a 
trustee-to-trustee transfer to the other type of IRA before the 
due date for the individual's income tax return for that 
year.\273\ In the case of a recharacterization, the 
contribution will be treated as having been made to the 
transferee IRA (and not the original, transferor IRA) as of the 
date of the original contribution. Both regular contributions 
and conversion contributions to a Roth IRA can be 
recharacterized as having been made to a traditional IRA.
---------------------------------------------------------------------------
    \273\Sec. 408A(d)(6).
---------------------------------------------------------------------------
      The amount transferred in a recharacterization must be 
accompanied by any net income allocable to the contribution. In 
general, even if a recharacterization is accomplished by 
transferring a specific asset, net income is calculated as a 
pro rata portion of income on the entire account rather than 
income allocable to the specific asset transferred. However, 
when doing a Roth conversion of an amount for a year, an 
individual may establish multiple Roth IRAs, for example, Roth 
IRAs with different investment strategies, and divide the 
amount being converted among the IRAs. The individual can then 
choose whether to recharacterize any of the Roth IRAs as a 
traditional IRA by transferring the entire amount in the 
particular Roth IRA to a traditional IRA.\274\ For example, if 
the value of the assets in a particular Roth IRA declines after 
the conversion, the conversion can be reversed by 
recharacterizing that IRA as a traditional IRA. The individual 
may then later convert that traditional IRA to a Roth IRA 
(referred to as a reconversion), including only the lower value 
in income. Treasury regulations prevent the reconversion from 
taking place immediately after the recharacterization, by 
requiring a minimum period to elapse before the reconversion. 
Generally the reconversion cannot occur sooner than the later 
of 30 days after the recharacterization or a date during the 
taxable year following the taxable year of the original 
conversion.\275\
---------------------------------------------------------------------------
    \274\Treas. Reg. sec. 1.408A-5, Q&A-2(b).
    \275\Treas. Reg. sec. 1.408A-5, Q&A-9.
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill repeals the special rule that allows IRA 
contributions to one type of IRA (either traditional or Roth) 
to be recharacterized as a contribution to the other type of 
IRA. Thus, for example, under the provision, a conversion 
contribution establishing a Roth IRA during a taxable year can 
no longer be recharacterized as a contribution to a traditional 
IRA (thereby unwinding the conversion).\276\
---------------------------------------------------------------------------
    \276\The provision does not preclude an individual from making a 
contribution to a traditional IRA and converting the traditional IRA to 
a Roth IRA. Rather, the provision would preclude the individual from 
later unwinding the conversion through a recharacterization.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment with a modification. Under the provision, the 
special rule that allows a contribution to one type of IRA to 
be recharacterized as a contribution to the other type of IRA 
does not apply to a conversion contribution to a Roth IRA. 
Thus, recharacterization cannot be used to unwind a Roth 
conversion. However, recharacterization is still permitted with 
respect to other contributions. For example, an individual may 
make a contribution for a year to a Roth IRA and, before the 
due date for the individual's income tax return for that year, 
recharacterize it as a contribution to a traditional IRA.\277\
---------------------------------------------------------------------------
    \277\In addition, an individual may still make a contribution to a 
traditional IRA and convert the traditional IRA to a Roth IRA, but the 
provision precludes the individual from later unwinding the conversion 
through a recharacterization.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.
2. Reduction in minimum age for allowable in-service distributions 
        (sec. 1502 of the House bill and secs. 401 and 457 of the Code)

                              PRESENT LAW

      Tax-favored employer-sponsored retirement plans consist 
of qualified retirement plans, including certain defined 
contribution plans that allow employees to make elective 
deferrals (a ``section 401(k) plan''), tax-deferred annuity 
plans (a ``section 403(b) plan''), which may also allow 
employees to make elective deferrals, and eligible deferred 
compensation plans of State and local government employers (a 
``governmental section 457(b) plan'').\278\ The terms of an 
employer-sponsored retirement plan generally determine when 
distributions are permitted. However, in some cases, 
restrictions may apply to distribution before an employee's 
severance from employment, referred to as ``in-service'' 
distributions.
---------------------------------------------------------------------------
    \278\Secs. 401(a), 401(k), 403(a), 403(b), and 457(b).
---------------------------------------------------------------------------
      In-service distributions of elective deferrals (and 
related earnings) under a section 401(k) plan generally are 
permitted only after attainment of age 59\1/2\ or termination 
of the plan.\279\ In-service distributions of elective 
deferrals (but not related earnings) are also permitted in the 
case of hardship. Elective deferrals under a section 403(b) 
plan are subject to in-service distribution restrictions 
similar to those applicable to elective deferrals under a 
section 401(k) plan, and, in some cases, other contributions to 
a section 403(b) plan are subject to similar restrictions.\280\
---------------------------------------------------------------------------
    \279\ Sec. 401(k)(2)(B). Similar restrictions apply to certain 
other contributions, such as employer matching or nonelective 
contributions required under the nondiscrimination safe harbors under 
section 401(k).
    \280\Secs. 403(b)(7)(A)(ii) and 403(b)(11).
---------------------------------------------------------------------------
      Pension plans, that is, qualified defined benefit plans 
and money purchase pension plans, a type of qualified defined 
contribution plan, generally may not permit in-service 
distributions before attainment of age 62 (or attainment of 
normal retirement age under the plan if earlier) or termination 
of the plan.\281\
---------------------------------------------------------------------------
    \281\Sec. 401(a)(36) and Treas. Reg. secs. 1.401-1(b)(1)(i) and 
1.401(a)-1(b).
---------------------------------------------------------------------------
      Deferrals under a governmental section 457(b) plan are 
subject to in-service distribution restrictions similar to 
those applicable to elective deferrals under a section 401(k) 
plan, except that in-service distributions under a governmental 
section 457(b) plan are permitted only after attainment of age 
70\1/2\ (rather than age 59\1/2\).\282\
---------------------------------------------------------------------------
    \282\Sec. 457(d)(1)(A).
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the House bill, in-service distributions are 
permitted under a pension plan or a governmental section 457(b) 
plan at age 59\1/2\, thus making the rules for those plans 
consistent with the rules for section 401(k) plans and section 
403(b) plans.
      Effective date.--The provision is effective for plan 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
3. Modification of rules governing hardship distributions (sec. 1503 of 
        the House bill and secs. 401 and 403 of the Code)

                              PRESENT LAW

      Elective deferrals under a section 401(k) plan or a 
section 403(b) plan may not be distributed before the 
occurrence of one or more specified events, including financial 
hardship of the employee.\283\
---------------------------------------------------------------------------
    \283\Secs. 401(k)(2)(B)(i)(IV) and 403(b)(7)(A)(ii) and (b)(11)(B). 
Other types of contributions may also be subject to this restriction.
---------------------------------------------------------------------------
      Applicable Treasury regulations provide that a 
distribution is made on account of hardship only if the 
distribution is made on account of an immediate and heavy 
financial need of the employee and is necessary to satisfy the 
heavy need.\284\ The Treasury regulations provide a safe harbor 
under which a distribution may be deemed necessary to satisfy 
an immediate and heavy financial need. One requirement of this 
safe harbor is that the employee be prohibited from making 
elective deferrals and employee contributions to the plan and 
all other plans maintained by the employer for at least six 
months after receipt of the hardship distribution.
---------------------------------------------------------------------------
    \284\Treas. Reg. sec. 1.401(k)-1(d)(3).
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the House bill, the Secretary of the Treasury is 
directed to modify the applicable regulations within one year 
of the date of enactment to (1) delete the requirement that an 
employee be prohibited from making elective deferrals and 
employee contributions for six months after the receipt of a 
hardship distribution in order for the distribution to be 
deemed necessary to satisfy an immediate and heavy financial 
need, and (2) make any other modifications necessary to carry 
out the purposes of the rule allowing elective deferrals to be 
distributed in the case of hardship. Thus, under the modified 
regulations, an employee would not be prevented for any period 
after the receipt of a hardship distribution from continuing to 
make elective deferrals and employee contributions.
      Effective date.--The regulations as revised by the 
provision shall apply to plan years beginning after December 
31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
4. Modification of rules relating to hardship withdrawals from cash or 
        deferred arrangements (sec. 1504 of the bill, sec. 11033(c) of 
        the Senate amendment, and sec. 401 of the Code)

                              PRESENT LAW

      Amounts attributable to elective deferrals (including 
earnings thereon) under a section 401(k) plan generally may not 
be distributed before the earliest of the employee's severance 
from employment, death, disability or attainment of age 59\1/
2\, or termination of the plan, or as a qualified reservist 
distribution.\285\ Elective deferrals, but not associated 
earnings, may be distributed on account of hardship.
---------------------------------------------------------------------------
    \285\Sec. 401(k)(2)(B)(i).
---------------------------------------------------------------------------
      An employer may make nonelective and matching 
contributions for employees under a section 401(k) plan. 
Elective deferrals, and matching contributions and after-tax 
employee contributions, are subject to special tests 
(``nondiscrimination tests'') to prevent discrimination in 
favor of highly compensated employees. Nonelective 
contributions and matching contributions that satisfy certain 
requirements (``qualified nonelective contributions and 
qualified matching contributions'') may be used to enable the 
plan to satisfy these nondiscrimination tests. One of the 
requirements is that these contributions be subject to the same 
distribution restrictions as elective deferrals, except that 
these contributions (and associated earnings) are not permitted 
to be distributed on account of hardship.
      Applicable Treasury regulations provide that a 
distribution is made on account of hardship only if the 
distribution is made on account of an immediate and heavy 
financial need of the employee and is necessary to satisfy the 
heavy need.\286\ The Treasury regulations provide a safe harbor 
under which a distribution may be deemed necessary to satisfy 
an immediate and heavy financial need. One requirement of the 
safe harbor is that the employee represent that the need cannot 
be satisfied through currently available plan loans. This in 
effect requires an employee to take any available plan loan 
before receiving a hardship distribution.
---------------------------------------------------------------------------
    \286\Treas. Reg. sec. 1.401(k)-1(d)(3).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill allows earnings on elective deferrals 
under a section 401(k) plan, as well as qualified nonelective 
contributions and qualified matching contributions (and 
associated earnings), to be distributed on account of hardship. 
Further, a distribution is not treated as failing to be on 
account of hardship solely because the employee does not take 
any available plan loan.
      Effective date.--The provision is effective for plan 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or Senate amendment.
5. Extended rollover period for the rollover of plan loan offset 
        amounts in certain cases (sec. 1505 of the bill, sec. 13613 of 
        the Senate amendment, and sec. 402 of the Code)

                              PRESENT LAW

Taxation of retirement plan distributions
      A distribution from a tax-favored employer-sponsored 
retirement plan (that is, a qualified retirement plan, section 
403(b) plan, or a governmental section 457(b) plan) is 
generally includible in gross income, except in the case of a 
qualified distribution from a designated Roth account or to the 
extent the distribution is a recovery of basis under the plan 
or the distribution is contributed to another such plan or an 
IRA (referred to as eligible retirement plans) in a tax-free 
rollover.\287\ In the case of a distribution from a retirement 
plan to an employee under age 59\1/2\, the distribution (other 
than a distribution from a governmental section 457(b) plan) is 
also subject to a 10-percent early distribution tax unless an 
exception applies.\288\
---------------------------------------------------------------------------
    \287\Secs. 402(a) and (c), 402A(d), 403(a) and (b), 457(a) and 
(e)(16).
    \288\Sec. 72(t).
---------------------------------------------------------------------------
      A distribution from a tax-favored employer-sponsored 
retirement plan that is an eligible rollover distribution may 
be rolled over to an eligible retirement plan.\289\ The 
rollover generally can be achieved by direct rollover (direct 
payment from the distributing plan to the recipient plan) or by 
contributing the distribution to the eligible retirement plan 
within 60 days of receiving the distribution (``60-day 
rollover'').
---------------------------------------------------------------------------
    \289\Certain distributions are not eligible rollover distributions, 
such as annuity payments, required minimum distributions, hardship 
distributions, and loans that are treated as deemed distributions under 
section 72(p).
---------------------------------------------------------------------------
      Employer-sponsored retirement plans are required to offer 
an employee a direct rollover with respect to any eligible 
rollover distribution before paying the amount to the employee. 
If an eligible rollover distribution is not directly rolled 
over to an eligible retirement plan, the taxable portion of the 
distribution generally is subject to mandatory 20-percent 
income tax withholding.\290\ Employees who do not elect a 
direct rollover but who roll over eligible distributions within 
60 days of receipt also defer tax on the rollover amounts; 
however, the 20 percent withheld will remain taxable unless the 
employee substitutes funds within the 60-day period.
---------------------------------------------------------------------------
    \290\Treas. Reg. sec. 1.402(c)-2, QA-1(b)(3).
---------------------------------------------------------------------------
Plan loans
      Employer-sponsored retirement plans may provide loans to 
employees. Unless the loan satisfies certain requirements in 
both form and operation, the amount of a retirement plan loan 
is a deemed distribution from the retirement plan, including 
that the terms of the loan provide for a repayment period of 
not more than five years (except for a loan specifically to 
purchase a home) and for level amortization of loan payments 
with payments not less frequently than quarterly.\291\ Thus, if 
an employee stops making payments on a loan before the loan is 
repaid, a deemed distribution of the outstanding loan balance 
generally occurs. A deemed distribution of an unpaid loan 
balance is generally taxed as though an actual distribution 
occurred, including being subject to a 10-percent early 
distribution tax, if applicable. A deemed distribution is not 
eligible for rollover to another eligible retirement plan.
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    \291\Sec. 72(p).
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      A plan may also provide that, in certain circumstances 
(for example, if an employee terminates employment), an 
employee's obligation to repay a loan is accelerated and, if 
the loan is not repaid, the loan is cancelled and the amount in 
employee's account balance is offset by the amount of the 
unpaid loan balance, referred to as a loan offset. A loan 
offset is treated as an actual distribution from the plan equal 
to the unpaid loan balance (rather than a deemed distribution), 
and (unlike a deemed distribution) the amount of the 
distribution is eligible for tax-free rollover to another 
eligible retirement plan within 60 days. However, the plan is 
not required to offer a direct rollover with respect to a plan 
loan offset amount that is an eligible rollover distribution, 
and the plan loan offset amount is generally not subject to 20-
percent income tax withholding.

                               HOUSE BILL

      Under the House bill, the period during which a qualified 
plan loan offset amount may be contributed to an eligible 
retirement plan as a rollover contribution is extended from 60 
days after the date of the offset to the due date (including 
extensions) for filing the Federal income tax return for the 
taxable year in which the plan loan offset occurs, that is, the 
taxable year in which the amount is treated as distributed from 
the plan. Under the provision, a qualified plan loan offset 
amount is a plan loan offset amount that is treated as 
distributed from a qualified retirement plan, a section 403(b) 
plan or a governmental section 457(b) plan solely by reason of 
the termination of the plan or the failure to meet the 
repayment terms of the loan because of the employee's 
separation from service, whether due to layoff, cessation of 
business, termination of employment, or otherwise. As under 
present law, a loan offset amount under the provision is the 
amount by which an employee's account balance under the plan is 
reduced to repay a loan from the plan.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except that a qualified plan loan offset amount is a plan loan 
offset amount that is treated as distributed from a qualified 
retirement plan, a section 403(b) plan or a governmental 
section 457(b) plan solely by reason of the termination of the 
plan or the failure to meet the repayment terms of the loan 
because of the employee's severance from employment.
      Effective date.--The provision is effective for plan loan 
offset amounts treated as distributed in taxable years 
beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
6. Modification of nondiscrimination rules for certain plans providing 
        benefits or contributions to older, longer service participants 
        (sec. 1506 of the House bill and sec. 401 of the Code)

                              PRESENT LAW

In general
      Qualified retirement plans are subject to 
nondiscrimination requirements, under which the group of 
employees covered by a plan (``plan coverage'') and the 
contributions or benefits provided to employees, including 
benefits, rights, and features under the plan, must not 
discriminate in favor of highly compensated employees.\292\ The 
timing of plan amendments must also not have the effect of 
discriminating significantly in favor of highly compensated 
employees. In addition, in the case of a defined benefit plan, 
the plan must benefit at least the lesser of (1) 50 employees 
and (2) the greater of 40 percent of all employees and two 
employees (or one employee if the employer has only one 
employee), referred to as the ``minimum participation'' 
requirements.\293\ These nondiscrimination requirements are 
designed to help ensure that qualified retirement plans achieve 
the goal of retirement security for both lower and higher paid 
employees.
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    \292\Secs. 401(a)(3)-(5) and 410(b). Detailed rules are provided in 
Treas. Reg. secs. 1.401(a)(4)-1 through -13 and secs. 1.410(b)-2 
through -10. In applying the nondiscrimination requirements, certain 
employees, such as those under age 21 or with less than a year of 
service, generally may be disregarded. In addition, employees of 
controlled groups and affiliated service groups under the aggregation 
rules of section 414(b), (c), (m) and (o) are treated as employed by a 
single employer.
    \293\Sec. 401(a)(26).
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      For nondiscrimination purposes, an employee generally is 
treated as highly compensated if the employee (1) was a five-
percent owner of the employer at any time during the year or 
the preceding year, or (2) had compensation for the preceding 
year in excess of $120,000 (for 2017).\294\ Employees who are 
not highly compensated are referred to as nonhighly compensated 
employees.
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    \294\Sec. 414(q). At the election of the employer, employees who 
are highly compensated based on the amount of their compensation may be 
limited to employees who were among the top 20 percent of employees 
based on compensation.
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Nondiscriminatory plan coverage
      Whether plan coverage of employees is nondiscriminatory 
is determined by calculating a plan's ratio percentage, that 
is, the ratio of the percentage of nonhighly compensated 
employees covered under the plan to the percentage of highly 
compensated employees covered. For this purpose, certain 
portions of a defined contribution plan are treated as separate 
plans to which the plan coverage requirements are applied 
separately, referred to as mandatory disaggregation. 
Specifically, the following, if provided under a plan, are 
treated as separate plans: the portion of a plan consisting of 
employee elective deferrals, the portion consisting of employer 
matching contributions, the portion consisting of employer 
nonelective contributions, and the portion consisting of an 
employee stock ownership plan (``ESOP'').\295\ Subject to 
mandatory disaggregation, different qualified retirement plans 
may otherwise be aggregated and tested together as a single 
plan, provided that they use the same plan year. The plan 
determined under these rules for plan coverage purposes 
generally is also treated as the plan for purposes of applying 
the other nondiscrimination requirements.
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    \295\Elective deferrals are contributions that an employee elects 
to have made to a defined contribution plan that includes a qualified 
cash or deferred arrangement (referred to as ``section 401(k) plan'') 
rather than receive the same amount as current compensation. Employer 
matching contributions are contributions made by an employer only if an 
employee makes elective deferrals or after-tax employee contributions. 
Employer nonelective contributions are contributions made by an 
employer regardless of whether an employee makes elective deferrals or 
after-tax employee contributions. Under section 4975(e)(7), an ESOP is 
a defined contribution plan, or portion of a defined contribution plan, 
that is designated as an ESOP and is designed to invest primarily in 
employer stock.
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      A plan's coverage is nondiscriminatory if the ratio 
percentage, as determined above, is 70 percent or greater. If a 
plan's ratio percentage is less than 70 percent, a multi-part 
test applies, referred to as the average benefit test. First, 
the plan must meet a ``nondiscriminatory classification 
requirement,'' that is, it must cover a group of employees that 
is reasonable and established under objective business criteria 
and the plan's ratio percentage must be at or above a level 
specified in the regulations, which varies depending on the 
percentage of nonhighly compensated employees in the employer's 
workforce. In addition, the average benefit percentage test 
must be satisfied.
      Under the average benefit percentage test, in general, 
the average rate of employer-provided contributions or benefit 
accruals for all nonhighly compensated employees under all 
plans of the employer must be at least 70 percent of the 
average contribution or accrual rate of all highly compensated 
employees.\296\ In applying the average benefit percentage 
test, elective deferrals made by employees, as well as employer 
matching and nonelective contributions, are taken into account. 
Generally, all plans maintained by the employer are taken into 
account, including ESOPs, regardless of whether plans use the 
same plan year.
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    \296\Contribution and benefit rates are generally determined under 
the rules for nondiscriminatory contributions or benefit accruals, 
described below. These rules are generally based on benefit accruals 
under a defined benefit plan, other than accruals attributable to 
after-tax employee contributions, and contributions allocated to 
participants' accounts under a defined contribution plan, other than 
allocations attributable to after-tax employee contributions. (Under 
these rules, contributions allocated to a participant's accounts are 
referred to as ``allocations,'' with the related rates referred to as 
``allocation rates,'' but ``contribution rates'' is used herein for 
convenience.) However, as discussed below, benefit accruals can be 
converted to actuarially equivalent contributions, and contributions 
can be converted to actuarially equivalent benefit accruals.
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      Under a transition rule applicable in the case of the 
acquisition or disposition of a business, or portion of a 
business, or a similar transaction, a plan that satisfied the 
plan coverage requirements before the transaction is deemed to 
continue to satisfy them for a period after the transaction, 
provided coverage under the plan is not significantly changed 
during that period.\297\
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    \297\Sec. 410(b)(6)(C).
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Nondiscriminatory contributions or benefit accruals
            In general
      There are three general approaches to testing the amount 
of benefits under qualified retirement plans: (1) design-based 
safe harbors under which the plan's contribution or benefit 
accrual formula satisfies certain uniformity standards, (2) a 
general test, described below, and (3) cross-testing of 
equivalent contributions or benefit accruals. Employee elective 
deferrals and employer matching contributions under defined 
contribution plans are subject to special testing rules and 
generally are not permitted to be taken into account in 
determining whether other contributions or benefits are 
nondiscriminatory.\298\
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    \298\Secs. 401(k) and (m), the latter of which applies also to 
after-tax employee contributions under a defined contribution plan.
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      The nondiscrimination rules allow contributions and 
benefit accruals to be provided to highly compensated and 
nonhighly compensated employees at the same percentage of 
compensation.\299\ Thus, the various testing approaches 
described below are generally applied to the amount of 
contributions or accruals provided as a percentage of 
compensation, referred to as a contribution rate or accrual 
rate. In addition, under the ``permitted disparity'' rules, in 
calculating an employee's contribution or accrual rate, credit 
may be given for the employer paid portion of Social Security 
taxes or benefits.\300\ The permitted disparity rules do not 
apply in testing whether elective deferrals, matching 
contributions, or ESOP contributions are nondiscriminatory.
---------------------------------------------------------------------------
    \299\For this purpose, under section 401(a)(17), compensation 
generally is limited to $265,000 per year (for 2016).
    \300\See sections 401(a)(5)(C) and (D) and 401(l) and Treas. Reg. 
section 1.401(a)(4)-7 and 1.401(l)-1 through -6 for rules for 
determining the amount of contributions or benefits that can be 
attributed to the employer-paid portion of Social Security taxes or 
benefits.
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      The general test is generally satisfied by measuring the 
rate of contribution or benefit accrual for each highly 
compensated employee to determine if the group of employees 
with the same or higher rate (a ``rate'' group) is a 
nondiscriminatory group, using the nondiscriminatory plan 
coverage standards described above. For this purpose, if the 
ratio percentage of a rate group is less than 70 percent, a 
simplified standard applies, which includes disregarding the 
reasonable classification requirement, but requires 
satisfaction of the average benefit percentage test.
            Cross-testing
      Cross-testing involves the conversion of contributions 
under a defined contribution plan or benefit accruals under a 
defined benefit plan to actuarially equivalent accruals or 
contributions, with the resulting equivalencies tested under 
the general test. However, employee elective deferrals and 
employer matching contributions under defined contribution 
plans are not permitted to be taken into account for this 
purpose, and cross-testing of contributions under a defined 
contribution plan, or cross-testing of a defined contribution 
plan aggregated with a defined benefit plan, is permitted only 
if certain threshold requirements are satisfied.
      In order for a defined contribution plan to be tested on 
an equivalent benefit accrual basis, one of the following three 
threshold conditions must be met:
           The plan has broadly available allocation 
        rates, that is, each allocation rate under the plan is 
        available to a nondiscriminatory group of employees 
        (disregarding certain permitted additional 
        contributions provided to employees as a replacement 
        for benefits under a frozen defined benefit plan, as 
        discussed below);
           The plan provides allocations that meet 
        prescribed designs under which allocations gradually 
        increase with age or service or are expected to provide 
        a target level of annuity benefit; or
           The plan satisfies a minimum allocation 
        gateway, under which each nonhighly compensated 
        employee has an allocation rate of (a) at least one-
        third of the highest rate for any highly compensated 
        employee, or (b) if less, at least five percent.
      In order for an aggregated defined contribution and 
defined benefit plan to be tested on an aggregate equivalent 
benefit accrual basis, one of the following three threshold 
conditions must be met:
             The plan must be primarily defined benefit 
        in character, that is, for more than fifty percent of 
        the nonhighly compensated employees under the plan, 
        their accrual rate under the defined benefit plan 
        exceeds their equivalent accrual rate under the defined 
        contribution plan;
             The plan consists of broadly available 
        separate defined benefit and defined contribution 
        plans, that is, the defined benefit plan and the 
        defined contribution plan would separately satisfy 
        simplified versions of the minimum coverage and 
        nondiscriminatory amount requirements; or
             The plan satisfies a minimum aggregate 
        allocation gateway, under which each nonhighly 
        compensated employee has an aggregate allocation rate 
        (consisting of allocations under the defined 
        contribution plan and equivalent allocations under the 
        defined benefit plan) of (a) at least one-third of the 
        highest aggregate allocation rate for any nonhighly 
        compensated employee, or (b) if less, at least five 
        percent in the case of a highest nonhighly compensated 
        employee's rate up to 25 percent, increased by one 
        percentage point for each five-percentage-point 
        increment (or portion thereof) above 25 percent, 
        subject to a maximum of 7.5 percent.
            Benefits, rights, and features
      Each benefit, right, or feature offered under the plan 
generally must be available to a group of employees that has a 
ratio percentage that satisfies the minimum coverage 
requirements, including the reasonable classification 
requirement if applicable, except that the average benefit 
percentage test does not have to be met, even if the ratio 
percentage is less than 70 percent.
Multiple-employer and section 403(b) plans
      A multiple-employer plan generally is a single plan 
maintained by two or more unrelated employers, that is, 
employers that are not treated as a single employer under the 
aggregation rules for related entities.\301\ The plan coverage 
and other nondiscrimination requirements are applied separately 
to the portions of a multiple-employer plan covering employees 
of different employers.\302\
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    \301\Sec. 413(c). Multiple-employer status does not apply if the 
plan is a multiemployer plan, defined under sec. 414(f) as a plan 
maintained pursuant to one or more collective bargaining agreements 
with two or more unrelated employers and to which the employers are 
required to contribute under the collective bargaining agreement(s). 
Multiemployer plans are also known as Taft-Hartley plans.
    \302\Treas. Reg. sec. 1.413-2(a)(3)(ii)-(iii).
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      Certain tax-exempt charitable organizations may offer 
their employees a tax-deferred annuity plan (``section 403(b) 
plan'').\303\ The nondiscrimination requirements, other than 
the requirements applicable to elective deferrals, generally 
apply to section 403(b) plans of private tax-exempt 
organizations. For purposes of applying the nondiscrimination 
requirements to a section 403(b) plan, subject to mandatory 
disaggregation, a qualified retirement plan may be combined 
with the section 403(b) plan and treated as a single plan.\304\ 
However, a section 403(b) plan and qualified retirement plan 
may not be treated as a single plan for purposes of applying 
the nondiscrimination requirements to the qualified retirement 
plan.
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    \303\Sec. 403(b). These plans are available to employers that are 
tax-exempt under section 501(c)(3), as well as to educational 
institutions of State or local governments.
    \304\Treas. Reg. sec. 1.410(b)-7(f).
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Closed and frozen defined benefit plans
      A defined benefit plan may be amended to limit 
participation in the plan to individuals who are employees as 
of a certain date. That is, employees hired after that date are 
not eligible to participate in the plan. Such a plan is 
sometimes referred to as a ``closed'' defined benefit plan 
(that is, closed to new entrants). In such a case, it is common 
for the employer also to maintain a defined contribution plan 
and to provide employer matching or nonelective contributions 
only to employees not covered by the defined benefit plan or at 
a higher rate to such employees.
      Over time, the group of employees continuing to accrue 
benefits under the defined benefit plan may come to consist 
more heavily of highly compensated employees, for example, 
because of greater turnover among nonhighly compensated 
employees or because increasing compensation causes nonhighly 
compensated employees to become highly compensated. In that 
case, the defined benefit plan may have to be combined with the 
defined contribution plan and tested on a benefit accrual 
basis. However, under the regulations, if none of the threshold 
conditions is met, testing on a benefits basis may not be 
available. Notwithstanding the regulations, recent IRS guidance 
provides relief for a limited period, allowing certain closed 
defined benefit plans to be aggregated with a defined 
contribution plan and tested on an aggregate equivalent 
benefits basis without meeting any of the threshold 
conditions.\305\ When the group of employees continuing to 
accrue benefits under a closed defined benefit plan consists 
more heavily of highly compensated employees, the benefits, 
rights, and features provided under the plan may also fail the 
tests under the existing nondiscrimination rules.
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    \305\Notice 2014-5, 2014-2 I.R.B. 276, extended by Notice 2015-28, 
2015-14 14 I.R.B. 848, Notice 2016-57, 2016-40 I.R.B. 432, and Notice 
2017-45, 2017-38 I.R.B. 232. Proposed regulations revising the 
nondiscrimination requirements for closed plans were also issued 
earlier this year, subject to various conditions. 81 Fed. Reg. 4976 
(January 29, 2016).
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      In some cases, if a defined benefit plan is amended to 
cease future accruals for all participants, referred to as a 
``frozen'' defined benefit plan, additional contributions to a 
defined contribution plan may be provided for participants, in 
particular for older participants, in order to make up in part 
for the loss of the benefits they expected to earn under the 
defined benefit plan (``make-whole'' contributions). As a 
practical matter, testing on a benefit accrual basis may be 
required in that case, but may not be available because the 
defined contribution plan does not meet any of the threshold 
conditions.

                               HOUSE BILL

Closed or frozen defined benefit plans
            In general
      Under the House bill, nondiscrimination relief applies 
with respect to benefits, rights, and features for a closed 
class of participants (``closed class''),\306\ and with respect 
to benefit accruals for a closed class, under a defined benefit 
plan that meets the requirements described below (referred to 
herein as an ``applicable'' defined benefit plan). In addition, 
the provision treats a closed or frozen applicable defined 
benefit plan as meeting the minimum participation requirements 
if the plan met the requirements as of the effective date of 
the plan amendment by which the plan was closed or frozen.
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    \306\References under the provision to a closed class of 
participants and similar references to a closed class include 
arrangements under which one or more classes of participants are 
closed, except that one or more classes of participants closed on 
different dates are not aggregated for purposes of determining the date 
any such class was closed.
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      If a portion of an applicable defined benefit plan 
eligible for relief under the provision is spun off to another 
employer, and if the spun-off plan continues to satisfy any 
ongoing requirements applicable for the relevant relief as 
described below, the relevant relief for the spun-off plan will 
continue with respect to the other employer.
            Benefits, rights, or features for a closed class
      Under the provision, an applicable defined benefit plan 
that provides benefits, rights, or features to a closed class 
does not fail the nondiscrimination requirements by reason of 
the composition of the closed class, or the benefits, rights, 
or features provided to the closed class, if (1) for the plan 
year as of which the class closes and the two succeeding plan 
years, the benefits, rights, and features satisfy the 
nondiscrimination requirements without regard to the relief 
under the provision, but taking into account the special 
testing rules described below,\307\ and (2) after the date as 
of which the class was closed, any plan amendment modifying the 
closed class or the benefits, rights, and features provided to 
the closed class does not discriminate significantly in favor 
of highly compensated employees.
---------------------------------------------------------------------------
    \307\Other testing options available under present law are also 
available for this purpose.
---------------------------------------------------------------------------
      For purposes of requirement (1) above, the following 
special testing rules apply:
             In applying the plan coverage transition 
        rule for business acquisitions, dispositions, and 
        similar transactions, the closing of the class of 
        participants is not treated as a significant change in 
        coverage;
             Two or more plans do not fail to be 
        eligible to be a treated as a single plan solely by 
        reason of having different plan years;\308\ and
---------------------------------------------------------------------------
    \308\This rule applies also for purposes applying the plan coverage 
and other nondiscrimination requirements to an applicable defined 
benefit plan and one or more defined contributions that, under the 
provision, may be treated as a single plan as described below.
---------------------------------------------------------------------------
             Changes in employee population are 
        disregarded to the extent attributable to individuals 
        who become employees or cease to be employees, after 
        the date the class is closed, by reason of a merger, 
        acquisition, divestiture, or similar event.
            Benefit accruals for a closed class
      Under the provision, an applicable defined benefit plan 
that provides benefits to a closed class may be aggregated, 
that is, treated as a single plan, and tested on a benefit 
accrual basis with one or more defined contribution plans 
(without having to satisfy the threshold conditions under 
present law) if (1) for the plan year as of which the class 
closes and the two succeeding plan years, the plan satisfies 
the plan coverage and nondiscrimination requirements without 
regard to the relief under the provision, but taking into 
account the special testing rules described above,\309\ and (2) 
after the date as of which the class was closed, any plan 
amendment modifying the closed class or the benefits provided 
to the closed class does not discriminate significantly in 
favor of highly compensated employees.
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    \309\Other testing options available under present law are also 
available for this purpose.
---------------------------------------------------------------------------
      Under the provision, defined contribution plans that may 
be aggregated with an applicable defined benefit plan and 
treated as a single plan include the portion of one or more 
defined contribution plans consisting of matching 
contributions, an ESOP, or matching or nonelective 
contributions under a section 403(b) plan. If an applicable 
defined benefit plan is aggregated with the portion of a 
defined contribution plan consisting of matching contributions, 
any portion of the defined contribution plan consisting of 
elective deferrals must also be aggregated. In addition, the 
matching contributions are treated in the same manner as 
nonelective contributions, including for purposes of permitted 
disparity.
            Applicable defined benefit plan
      An applicable defined benefit plan to which relief under 
the provision applies is a defined benefit plan under which the 
class was closed (or the plan frozen) before April 5, 2017, or 
that meets the following alternative conditions: (1) taking 
into account any predecessor plan, the plan has been in effect 
for at least five years as of the date the class is closed (or 
the plan is frozen) and (2) under the plan, during the five-
year period preceding that date, (a) for purposes of the relief 
provided with respect to benefits, rights, and features for a 
closed class, there has not been a substantial increase in the 
coverage or value of the benefits, rights, or features, or (b) 
for purposes of the relief provided with respect to benefit 
accruals for a closed class or the minimum participation 
requirements, there has not been a substantial increase in the 
coverage or benefits under the plan.
      For purposes of (2)(a) above, a plan is treated as having 
a substantial increase in coverage or value of benefits, 
rights, or features only if, during the applicable five-year 
period, either the number of participants covered by the 
benefits, rights, or features on the date the period ends is 
more than 50 percent greater than the number on the first day 
of the plan year in which the period began, or the benefits, 
rights, and features have been modified by one or more plan 
amendments in such a way that, as of the date the class is 
closed, the value of the benefits, rights, and features to the 
closed class as a whole is substantially greater than the value 
as of the first day of the five-year period, solely as a result 
of the amendments.
      For purposes of (2)(b) above, a plan is treated as having 
had a substantial increase in coverage or benefits only if, 
during the applicable five-year period, either the number of 
participants benefiting under the plan on the date the period 
ends is more than 50 percent greater than the number of 
participants on the first day of the plan year in which the 
period began, or the average benefit provided to participants 
on the date the period ends is more than 50 percent greater 
than the average benefit provided on the first day of the plan 
year in which the period began. In applying this requirement, 
the average benefit provided to participants under the plan is 
treated as having remained the same between the two relevant 
dates if the benefit formula applicable to the participants has 
not changed between the dates and, if the benefit formula has 
changed, the average benefit under the plan is considered to 
have increased by more than 50 percent only if the target 
normal cost for all participants benefiting under the plan for 
the plan year in which the five-year period ends exceeds the 
target normal cost for all such participants for that plan year 
if determined using the benefit formula in effect for the 
participants for the first plan year in the five-year period by 
more than 50 percent.\310\ In applying these rules, a multiple-
employer plan is treated as a single plan, rather than as 
separate plans separately covering the employees of each 
participating employer.
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    \310\Under the funding requirements applicable to defined benefit 
plans, target normal cost for a plan year (defined in section 
430(b)(1)(A)(i)) is generally the sum of the present value of the 
benefits expected to be earned under the plan during the plan year plus 
the amount of plan-related expenses to be paid from plan assets during 
the plan year. Under the provision, in applying this average benefit 
rule to certain defined benefit plans maintained by cooperative 
organizations and charities, referred to as CSEC plans (defined in 
section 414(y)), which are subject to different funding requirements, 
the CSEC plan's normal cost under section 433(j)(1)(B) is used instead 
of target normal cost.
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      In applying these standards, any increase in coverage or 
value, or in coverage or benefits, whichever is applicable, is 
generally disregarded if it is attributable to coverage and 
value, or coverage and benefits, provided to employees who (1) 
became participants as a result of a merger, acquisition, or 
similar event that occurred during the 7-year period preceding 
the date the class was closed, or (2) became participants by 
reason of a merger of the plan with another plan that had been 
in effect for at least five years as of the date of the merger 
and, in the case of benefits, rights, or features for a closed 
class, under the merger, the benefits, rights, or features 
under one plan were conformed to the benefits, rights, or 
features under the other plan prospectively.
Make-whole contributions under a defined contribution plan
      Under the provision, a defined contribution plan is 
permitted to be tested on an equivalent benefit accrual basis 
(without having to satisfy the threshold conditions under 
present law) if the following requirements are met:
           The plan provides make-whole contributions 
        to a closed class of participants whose accruals under 
        a defined benefit plan have been reduced or ended 
        (``make-whole class'');
           For the plan year of the defined 
        contribution plan as of which the make-whole class 
        closes and the two succeeding plan years, the make-
        whole class satisfies the nondiscriminatory 
        classification requirement under the plan coverage 
        rules, taking into account the special testing rules 
        described above;
           After the date as of which the class was 
        closed, any amendment to the defined contribution plan 
        modifying the make-whole class or the allocations, 
        benefits, rights, and features provided to the make-
        whole class does not discriminate significantly in 
        favor of highly compensated employees; and
           Either the class was closed before April 5, 
        2017, or the defined benefit plan is an applicable 
        defined benefit plan under the alternative conditions 
        applicable for purposes of the relief provided with 
        respect to benefit accruals for a closed class.
      With respect to one or more defined contribution plans 
meeting the requirements above, in applying the plan coverage 
and nondiscrimination requirements, the portion of the plan 
providing make-whole or other nonelective contributions may 
also be aggregated and tested on an equivalent benefit accrual 
basis with the portion of one or more other defined 
contribution plans consisting of matching contributions, an 
ESOP, or matching or nonelective contributions under a section 
403(b) plan. If the plan is aggregated with the portion of a 
defined contribution plan consisting of matching contributions, 
any portion of the defined contribution plan consisting of 
elective deferrals must also be aggregated. In addition, the 
matching contributions are treated in the same manner as 
nonelective contributions, including for purposes of permitted 
disparity.
      Under the provision, ``make-whole contributions'' 
generally means nonelective contributions for each employee in 
the make-whole class that are reasonably calculated, in a 
consistent manner, to replace some or all of the retirement 
benefits that the employee would have received under the 
defined benefit plan and any other plan or qualified cash or 
deferred arrangement under a section 401(k) plan if no change 
had been made to the defined benefit plan and other plan or 
arrangement.\311\ However, under a special rule, in the case of 
a defined contribution plan that provides benefits, rights, or 
features to a closed class of participants whose accruals under 
a defined benefit plan have been reduced or eliminated, the 
plan will not fail to satisfy the nondiscrimination 
requirements solely by reason of the composition of the closed 
class, or the benefits, rights, or features provided to the 
closed class, if the defined contribution plan and defined 
benefit plan otherwise meet the requirements described above 
but for the fact that the make-whole contributions under the 
defined contribution plan are made in whole or in part through 
matching contributions.
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    \311\For this purpose, consistency is not required with respect to 
employees who were subject to different benefit formulas under the 
defined benefit plan.
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      If a portion of a defined contribution plan eligible for 
relief under the provision is spun off to another employer, and 
if the spun-off plan continues to satisfy any ongoing 
requirements applicable for the relevant relief as described 
above, the relevant relief for the spun-off plan will continue 
with respect to the other employer.
      Effective date.--The provision is generally effective on 
the date of enactment without regard to whether any plan 
modifications referred to in the provision are adopted or 
effective before, on, or after the date of enactment. However, 
at the election of a plan sponsor, the provision will apply to 
plan years beginning after December 31, 2013. For purposes of 
the provision, a closed class of participants under a defined 
benefit plan is treated as being closed before April 5, 2017, 
if the plan sponsor's intention to create the closed class is 
reflected in formal written documents and communicated to 
participants before that date. In addition, a plan does not 
fail to be eligible for the relief under the provision solely 
because (1) in the case of benefits, rights, or features for a 
closed class under a defined benefit plan, the plan was amended 
before the date of enactment to eliminate one or more benefits, 
rights, or features and is further amended after the date of 
enactment to provide the previously eliminated benefits, 
rights, or features to a closed class of participants, or (2) 
in the case of benefit accruals for a closed class under a 
defined benefit plan or application of the minimum benefit 
requirements to a closed or frozen defined benefit plan, the 
plan was amended before the date of the enactment to cease all 
benefit accruals and is further amended after the date of 
enactment to provide benefit accruals to a closed class of 
participants. In either case, the relevant relief applies only 
if the plan otherwise meets the requirements for the relief, 
and, in applying the relevant relief, the date the class of 
participants is closed is the effective date of the later 
amendment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
7. Modification of rules applicable to length of service award programs 
        for bona fide public safety volunteers (sec. 13612 of the 
        Senate amendment and sec. 457(e) of the Code)

                              PRESENT LAW

      Special rules apply to deferred compensation plans of 
State and local government and private, tax-exempt 
employers.\312\ However, an exception to these rules applies in 
the case of a plan paying solely length of service awards to 
bona fide volunteers (or their beneficiaries) on account of 
qualified services performed by the volunteers. For this 
purpose, qualified services consist of firefighting and fire 
prevention services, emergency medical services, and ambulance 
services. An individual is treated as a bona fide volunteer for 
this purpose if the only compensation received by the 
individual for performing qualified services is in the form of 
(1) reimbursement or a reasonable allowance for reasonable 
expenses incurred in the performance of such services, or (2) 
reasonable benefits (including length of service awards) and 
nominal fees for the services, customarily paid in connection 
with the performance of such services by volunteers. The 
exception applies only if the aggregate amount of length of 
service awards accruing for a bona fide volunteer with respect 
to any year of service does not exceed $3,000.
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    \312\Sec. 457.
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                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment increases the aggregate amount of 
length of service awards that may accrue for a bona fide 
volunteer with respect to any year of service to $6,000 and 
adjusts that amount in $500 increments to reflect changes in 
cost-of-living for years after the first year the provision is 
effective. In addition, under the provision, if the plan is a 
defined benefit plan, the limit applies to the actuarial 
present value of the aggregate amount of length of service 
awards accruing with respect to any year of service. Actuarial 
present value is to be calculated using reasonable actuarial 
assumptions and methods, assuming payment will be made under 
the most valuable form of payment under the plan with payment 
commencing at the later of the earliest age at which unreduced 
benefits are payable under the plan or the participant's age at 
the time of the calculation.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

  F. Modifications to Estate, Gift, and Generation-Skipping Transfers 
Taxes (secs. 1601 and 1602 of the House bill, sec. 11061 of the Senate 
            amendment, and secs. 2001 and 2010 of the Code)

                              PRESENT LAW

In general
      A gift tax is imposed on certain lifetime transfers, and 
an estate tax is imposed on certain transfers at death. A 
generation-skipping transfer tax generally is imposed on 
transfers, either directly or in trust or similar arrangement, 
to a ``skip person'' (i.e., a beneficiary in a generation more 
than one generation younger than that of the transferor). 
Transfers subject to the generation-skipping transfer tax 
include direct skips, taxable terminations, and taxable 
distributions.
      Income tax rules determine the recipient's tax basis in 
property acquired from a decedent or by gift. Gifts and 
bequests generally are excluded from the recipient's gross 
income.\313\
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    \313\Sec. 102.
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Common features of the estate, gift and generation-skipping transfer 
        taxes
            Unified credit (exemption) and tax rates
      Unified credit.--A unified credit is available with 
respect to taxable transfers by gift and at death.\314\ The 
unified credit offsets tax, computed using the applicable 
estate and gift tax rates, on a specified amount of transfers, 
referred to as the applicable exclusion amount, or exemption 
amount. The exemption amount was set at $5 million for 2011 and 
is indexed for inflation for later years.\315\ For 2017, the 
inflation-indexed exemption amount is $5.49 million.\316\ 
Exemption used during life to offset taxable gifts reduces the 
amount of exemption that remains at death to offset the value 
of a decedent's estate. An election is available under which 
exemption that is not used by a decedent may be used by the 
decedent's surviving spouse (exemption portability).
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    \314\Sec. 2010.
    \315\For 2011 and later years, the gift and estate taxes were 
reunified, meaning that the gift tax exemption amount was increased to 
equal the estate tax exemption amount.
    \316\For 2017, the $5.49 million exemption amount results in a 
unified credit of $2,141,800, after applying the applicable rates set 
forth in section 2001(c).
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      Common tax rate table.--A common tax-rate table with a 
top marginal tax rate of 40 percent is used to compute gift tax 
and estate tax. The 40-percent rate applies to transfers in 
excess of $1 million (to the extent not exempt). Because the 
exemption amount currently shields the first $5.49 million in 
gifts and bequests from tax, transfers in excess of the 
exemption amount generally are subject to tax at the highest 
marginal rate (40 percent).
      Generation-skipping transfer tax exemption and rate.--The 
generation-skipping transfer tax is a separate tax that can 
apply in addition to either the gift tax or the estate tax. The 
tax rate and exemption amount for generation-skipping transfer 
tax purposes, however, are set by reference to the estate tax 
rules. Generation-skipping transfer tax is imposed using a flat 
rate equal to the highest estate tax rate (40 percent). Tax is 
imposed on cumulative generation-skipping transfers in excess 
of the generation-skipping transfer tax exemption amount in 
effect for the year of the transfer. The generation-skipping 
transfer tax exemption for a given year is equal to the estate 
tax exemption amount in effect for that year (currently $5.49 
million).
      Transfers between spouses.--A 100-percent marital 
deduction generally is permitted for the value of property 
transferred between spouses.\317\ In addition, transfers of 
``qualified terminable interest property'' also are eligible 
for the marital deduction. Qualified terminable interest 
property is property: (1) that passes from the decedent, (2) in 
which the surviving spouse has a ``qualifying income interest 
for life,'' and (3) to which an election under these rules 
applies. A qualifying income interest for life exists if: (1) 
the surviving spouse is entitled to all the income from the 
property (payable annually or at more frequent intervals) or 
has the right to use the property during the spouse's life, and 
(2) no person has the power to appoint any part of the property 
to any person other than the surviving spouse.
---------------------------------------------------------------------------
    \317\Secs. 2056 and 2523.
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      A marital deduction generally is denied for property 
passing to a surviving spouse who is not a citizen of the 
United States. A marital deduction is permitted, however, for 
property passing to a qualified domestic trust of which the 
noncitizen surviving spouse is a beneficiary. A qualified 
domestic trust is a trust that has as its trustee at least one 
U.S. citizen or U.S. corporation. No corpus may be distributed 
from a qualified domestic trust unless the U.S. trustee has the 
right to withhold any estate tax imposed on the distribution.
      Tax is imposed on (1) any distribution from a qualified 
domestic trust before the date of the death of the noncitizen 
surviving spouse and (2) the value of the property remaining in 
a qualified domestic trust on the date of death of the 
noncitizen surviving spouse. The tax is computed as an 
additional estate tax on the estate of the first spouse to die.
      Transfers to charity.--Contributions to section 501(c)(3) 
charitable organizations and certain other organizations may be 
deducted from the value of a gift or from the value of the 
assets in an estate for Federal gift or estate tax 
purposes.\318\ The effect of the deduction generally is to 
remove the full fair market value of assets transferred to 
charity from the gift or estate tax base; unlike the income tax 
charitable deduction, there are no percentage limits on the 
deductible amount. For estate tax purposes, the charitable 
deduction is limited to the value of the transferred property 
that is required to be included in the gross estate.\319\ A 
charitable contribution of a partial interest in property, such 
as a remainder or future interest, generally is not deductible 
for gift or estate tax purposes.\320\
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    \318\Secs. 2055 and 2522.
    \319\Sec. 2055(d).
    \320\Secs. 2055(e)(2) and 2522(c)(2).
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The estate tax
            Overview
      The Code imposes a tax on the transfer of the taxable 
estate of a decedent who is a citizen or resident of the United 
States.\321\ The taxable estate is determined by deducting from 
the value of the decedent's gross estate any deductions 
provided for in the Code. After applying tax rates to determine 
a tentative amount of estate tax, certain credits are 
subtracted to determine estate tax liability.\322\
---------------------------------------------------------------------------
    \321\Sec. 2001(a).
    \322\More mechanically, the taxable estate is combined with the 
value of adjusted taxable gifts made during the decedent's life 
(generally, post-1976 gifts), before applying tax rates to determine a 
tentative total amount of tax. The portion of the tentative tax 
attributable to lifetime gifts is then subtracted from the total 
tentative tax to determine the gross estate tax, i.e., the amount of 
estate tax before considering available credits. Credits are then 
subtracted to determine the estate tax liability.
    This method of computation was designed to ensure that a taxpayer 
only gets one run up through the rate brackets for all lifetime gifts 
and transfers at death, at a time when the thresholds for applying the 
higher marginal rates exceeded the exemption amount. However, the 
higher ($5.49 million) present-law exemption amount effectively renders 
the lower rate brackets irrelevant, because the top marginal rate 
bracket applies to all transfers in excess of $1 million. In other 
words, all transfers that are not exempt by reason of the $5.49 million 
exemption amount are taxed at the highest marginal rate of 40 percent.
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      Because the estate tax shares a common unified credit 
(exemption) and tax rate table with the gift tax, the exemption 
amounts and tax rates are described together above, along with 
certain other common features of these taxes.
            Gross estate
      A decedent's gross estate includes, to the extent 
provided for in other sections of the Code, the date-of-death 
value of all of a decedent's property, real or personal, 
tangible or intangible, wherever situated.\323\ In general, the 
value of property for this purpose is the fair market value of 
the property as of the date of the decedent's death, although 
an executor may elect to value certain property as of the date 
that is six months after the decedent's death (the alternate 
valuation date).\324\
---------------------------------------------------------------------------
    \323\Sec. 2031(a).
    \324\Sec. 2032.
---------------------------------------------------------------------------
      The gross estate includes not only property directly 
owned by the decedent, but also other property in which the 
decedent had a beneficial interest at the time of his or her 
death.\325\ The gross estate also includes certain transfers 
made by the decedent prior to his or her death, including: (1) 
certain gifts made within three years prior to the decedent's 
death;\326\ (2) certain transfers of property in which the 
decedent retained a life estate;\327\ (3) certain transfers 
taking effect at death;\328\ and (4) revocable transfers.\329\ 
In addition, the gross estate also includes property with 
respect to which the decedent had, at the time of death, a 
general power of appointment (generally, the right to determine 
who will have beneficial ownership).\330\ The value of a life 
insurance policy on the decedent's life is included in the 
gross estate if the proceeds are payable to the decedent's 
estate or the decedent had incidents of ownership with respect 
to the policy at the time of his or her death.\331\
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    \325\Sec. 2033.
    \326\Sec. 2035.
    \327\Sec. 2036.
    \328\Sec. 2037.
    \329\Sec. 2038.
    \330\Sec. 2041.
    \331\Sec. 2042.
---------------------------------------------------------------------------
            Deductions from the gross estate
      A decedent's taxable estate is determined by subtracting 
from the value of the gross estate any deductions provided for 
in the Code.
      Marital and charitable transfers.--As described above, 
transfers to a surviving spouse or to charity generally are 
deductible for estate tax purposes. The effect of the marital 
and charitable deductions generally is to remove assets 
transferred to a surviving spouse or to charity from the estate 
tax base.
      State death taxes.--An estate tax deduction is permitted 
for death taxes (e.g., any estate, inheritance, legacy, or 
succession taxes) actually paid to any State or the District of 
Columbia, in respect of property included in the gross estate 
of the decedent.\332\ Such State taxes must have been paid and 
claimed before the later of: (1) four years after the filing of 
the estate tax return; or (2) (a) 60 days after a decision of 
the U.S. Tax Court determining the estate tax liability becomes 
final, (b) the expiration of the period of extension to pay 
estate taxes over time under section 6166, or (c) the 
expiration of the period of limitations in which to file a 
claim for refund or 60 days after a decision of a court in 
which such refund suit has become final.
---------------------------------------------------------------------------
    \332\Sec. 2058.
---------------------------------------------------------------------------
      Other deductions.--A deduction is available for funeral 
expenses, estate administration expenses, and claims against 
the estate, including certain taxes.\333\ A deduction also is 
available for uninsured casualty and theft losses incurred 
during the settlement of the estate.\334\
---------------------------------------------------------------------------
    \333\Sec. 2053.
    \334\Sec. 2054.
---------------------------------------------------------------------------
            Credits against tax
      After accounting for allowable deductions, a gross amount 
of estate tax is computed. Estate tax liability is then 
determined by subtracting allowable credits from the gross 
estate tax.
      Unified credit.--The most significant credit allowed for 
estate tax purposes is the unified credit, which is discussed 
in greater detail above.\335\ For 2017, the value of the 
unified credit is $2,141,800, which has the effect of exempting 
$5.49 million in transfers from tax. The unified credit 
available at death is reduced by the amount of unified credit 
used to offset gift tax on gifts made during the decedent's 
life.
---------------------------------------------------------------------------
    \335\Sec. 2010.
---------------------------------------------------------------------------
      Other credits.--Estate tax credits also are allowed for: 
(1) gift tax paid on certain pre-1977 gifts (before the estate 
and gift tax computations were integrated);\336\ (2) estate tax 
paid on certain prior transfers (to limit the estate tax burden 
when estate tax is imposed on transfers of the same property in 
two estates by reason of deaths in rapid succession);\337\ and 
(3) certain foreign death taxes paid (generally, where the 
property is situated in a foreign country but included in the 
decedent's U.S. gross estate).\338\
---------------------------------------------------------------------------
    \336\Sec. 2012.
    \337\Sec. 2013.
    \338\Sec. 2014. In certain cases, an election may be made to deduct 
foreign death taxes. See section 2053(d).
---------------------------------------------------------------------------
            Provisions affecting small and family-owned businesses and 
                    farms
      Special-use valuation.--An executor can elect to value 
for estate tax purposes certain ``qualified real property'' 
used in farming or another qualifying closely-held trade or 
business at its current-use value, rather than its fair market 
value.\339\ The maximum reduction in value for such real 
property is $750,000 (adjusted for inflation occurring after 
1997; the inflation-adjusted amount for 2017 is $1,120,000). In 
general, real property qualifies for special-use valuation only 
if (1) at least 50 percent of the adjusted value of the 
decedent's gross estate (including both real and personal 
property) consists of a farm or closely-held business property 
in the decedent's estate and (2) at least 25 percent of the 
adjusted value of the gross estate consists of farm or closely 
held business real property. In addition, the property must be 
used in a qualified use (e.g., farming) by the decedent or a 
member of the decedent's family for five of the eight years 
before the decedent's death.
---------------------------------------------------------------------------
    \339\Sec. 2032A.
---------------------------------------------------------------------------
      If, after a special-use valuation election is made, the 
heir who acquired the real property ceases to use it in its 
qualified use within 10 years of the decedent's death, an 
additional estate tax is imposed to recapture the entire 
estate-tax benefit of the special-use valuation.
      Installment payment of estate tax for closely held 
businesses.--Under present law, the estate tax generally is due 
within nine months of a decedent's death. However, an executor 
generally may elect to pay estate tax attributable to an 
interest in a closely held business in two or more installments 
(but no more than 10).\340\ An estate is eligible for payment 
of estate tax in installments if the value of the decedent's 
interest in a closely held business exceeds 35 percent of the 
decedent's adjusted gross estate (i.e., the gross estate less 
certain deductions). If the election is made, the estate may 
defer payment of principal and pay only interest for the first 
five years, followed by up to 10 annual installments of 
principal and interest. This provision effectively extends the 
time for paying estate tax by 14 years from the original due 
date of the estate tax. A special two-percent interest rate 
applies to the amount of deferred estate tax attributable to 
the first $1 million (adjusted annually for inflation occurring 
after 1998; the inflation-adjusted amount for 2017 is 
$1,490,000) in taxable value of a closely held business. The 
interest rate applicable to the amount of estate tax 
attributable to the taxable value of the closely held business 
in excess of $1 million (adjusted for inflation) is equal to 45 
percent of the rate applicable to underpayments of tax under 
section 6621 of the Code (i.e., 45 percent of the Federal 
short-term rate plus three percentage points).\341\ Interest 
paid on deferred estate taxes is not deductible for estate or 
income tax purposes.
---------------------------------------------------------------------------
    \340\Sec. 6166.
    \341\The interest rate on this portion adjusts with the Federal 
short-term rate.
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The gift tax
            Overview
      The Code imposes a tax for each calendar year on the 
transfer of property by gift during such year by any 
individual, whether a resident or nonresident of the United 
States.\342\ The amount of taxable gifts for a calendar year is 
determined by subtracting from the total amount of gifts made 
during the year: (1) the gift tax annual exclusion (described 
below); and (2) allowable deductions.
---------------------------------------------------------------------------
    \342\Sec. 2501(a).
---------------------------------------------------------------------------
      Gift tax for the current taxable year is determined by: 
(1) computing a tentative tax on the combined amount of all 
taxable gifts for the current and all prior calendar years 
using the common gift tax and estate tax rate table; (2) 
computing a tentative tax only on all prior-year gifts; (3) 
subtracting the tentative tax on prior-year gifts from the 
tentative tax computed for all years to arrive at the portion 
of the total tentative tax attributable to current-year gifts; 
and, finally, (4) subtracting the amount of unified credit not 
consumed by prior-year gifts.
      Because the gift tax shares a common unified credit 
(exemption) and tax rate table with the estate tax, the 
exemption amounts and tax rates are described together above, 
along with certain other common features of these taxes.
            Transfers by gift
      The gift tax applies to a transfer by gift regardless of 
whether: (1) the transfer is made outright or in trust; (2) the 
gift is direct or indirect; or (3) the property is real or 
personal, tangible or intangible.\343\ For gift tax purposes, 
the value of a gift of property is the fair market value of the 
property at the time of the gift.\344\ Where property is 
transferred for less than full consideration, the amount by 
which the value of the property exceeds the value of the 
consideration is considered a gift and is included in computing 
the total amount of a taxpayer's gifts for a calendar 
year.\345\
---------------------------------------------------------------------------
    \343\Sec. 2511(a).
    \344\Sec. 2512(a).
    \345\Sec. 2512(b).
---------------------------------------------------------------------------
      For a gift to occur, a donor generally must relinquish 
dominion and control over donated property. For example, if a 
taxpayer transfers assets to a trust established for the 
benefit of his or her children, but retains the right to revoke 
the trust, the taxpayer may not have made a completed gift, 
because the taxpayer has retained dominion and control over the 
transferred assets. A completed gift made in trust, on the 
other hand, often is treated as a gift to the trust 
beneficiaries.
      By reason of statute, certain transfers are not treated 
as transfers by gift for gift tax purposes. These include, for 
example, certain transfers for educational and medical 
purposes,\346\ transfers to section 527 political 
organizations,\347\ and transfers to tax-exempt organizations 
described in sections 501(c)(4), (5), or (6).\348\
---------------------------------------------------------------------------
    \346\Sec. 2503(e).
    \347\Sec. 2501(a)(4).
    \348\Sec. 2501(a)(6).
---------------------------------------------------------------------------
            Taxable gifts
      As stated above, the amount of a taxpayer's taxable gifts 
for the year is determined by subtracting from the total amount 
of the taxpayer's gifts for the year the gift tax annual 
exclusion and any available deductions.
      Gift tax annual exclusion.--Under present law, donors of 
lifetime gifts are provided an annual exclusion of $14,000 per 
donee in 2017 (indexed for inflation from the 1997 annual 
exclusion amount of $10,000) for gifts of present interests in 
property during the taxable year.\349\ If the non-donor spouse 
consents to split the gift with the donor spouse, then the 
annual exclusion is $28,000 per donee in 2017. In general, 
unlimited transfers between spouses are permitted without 
imposition of a gift tax. Special rules apply to the 
contributions to a qualified tuition program (``529 Plan'') 
including an election to treat a contribution that exceeds the 
annual exclusion as a contribution made ratably over a five-
year period beginning with the year of the contribution.\350\
---------------------------------------------------------------------------
    \349\Sec. 2503(b).
    \350\Sec. 529(c)(2).
---------------------------------------------------------------------------
      Marital and charitable deductions.--As described above, 
transfers to a surviving spouse or to charity generally are 
deductible for gift tax purposes. The effect of the marital and 
charitable deductions generally is to remove assets transferred 
to a surviving spouse or to charity from the gift tax base.
The generation-skipping transfer tax
      A generation-skipping transfer tax generally is imposed 
(in addition to the gift tax or the estate tax) on transfers, 
either directly or in trust or similar arrangement, to a ``skip 
person'' (i.e., a beneficiary in a generation more than one 
generation below that of the transferor). Transfers subject to 
the generation-skipping transfer tax include direct skips, 
taxable terminations, and taxable distributions.
            Exemption and tax rate
      An exemption generally equal to the estate tax exemption 
amount ($5.49 million for 2017) is provided for each person 
making generation-skipping transfers. The exemption may be 
allocated by a transferor (or his or her executor) to 
transferred property, and in some cases is automatically 
allocated. The allocation of generation-skipping transfer tax 
exemption effectively reduces the tax rate on a generation-
skipping transfer.
      The tax rate on generation-skipping transfers is a flat 
rate of tax equal to the maximum estate and gift tax rate (40 
percent) multiplied by the ``inclusion ratio.'' The inclusion 
ratio with respect to any property transferred indicates the 
amount of ``generation-skipping transfer tax exemption'' 
allocated to a trust (or to property transferred in a direct 
skip) relative to the total value of property transferred.\351\ 
If, for example, a taxpayer transfers $5 million in property to 
a trust and allocates $5 million of exemption to the transfer, 
the inclusion ratio is zero, and the applicable tax rate on any 
subsequent generation-skipping transfers from the trust is zero 
percent (40 percent multiplied by the inclusion ratio of zero). 
If, however, the taxpayer allocated only $2.5 million of 
exemption to the transfer, the inclusion ratio is 0.5, and the 
applicable tax rate on any subsequent generation-skipping 
transfers from the trust is 20 percent (40 percent multiplied 
by the inclusion ratio of 0.5). If the taxpayer allocates no 
exemption to the transfer, the inclusion ratio is one, and the 
applicable tax rate on any subsequent generation-skipping 
transfers from the trust is 40 percent (40 percent multiplied 
by the inclusion ratio of one).
---------------------------------------------------------------------------
    \351\The inclusion ratio is one minus the applicable fraction. The 
applicable fraction is the amount of exemption allocated to a trust (or 
to a direct skip) divided by the value of assets transferred.
---------------------------------------------------------------------------
            Generation-skipping transfers
      Generation-skipping transfer tax generally is imposed at 
the time of a generation-skipping transfer--a direct skip, a 
taxable termination, or a taxable distribution.
      A direct skip is any transfer subject to estate or gift 
tax of an interest in property to a skip person. A skip person 
may be a natural person or certain trusts. All persons assigned 
to the second or more remote generation below the transferor 
are skip persons (e.g., grandchildren and great-grandchildren). 
Trusts are skip persons if (1) all interests in the trust are 
held by skip persons, or (2) no person holds an interest in the 
trust and at no time after the transfer may a distribution 
(including distributions and terminations) be made to a non-
skip person.
      A taxable termination is a termination (by death, lapse 
of time, release of power, or otherwise) of an interest in 
property held in trust unless, immediately after such 
termination, a non-skip person has an interest in the property, 
or unless at no time after the termination may a distribution 
(including a distribution upon termination) be made from the 
trust to a skip person.
      A taxable distribution is a distribution from a trust to 
a skip person (other than a taxable termination or direct 
skip). If a transferor allocates generation-skipping transfer 
tax exemption to a trust prior to the taxable distribution, 
generation-skipping transfer tax may be avoided.
Income tax basis in property received
            In general
      Gain or loss, if any, on the disposition of property is 
measured by the taxpayer's amount realized (i.e., gross 
proceeds received) on the disposition, less the taxpayer's 
basis in such property. Basis generally represents a taxpayer's 
investment in property with certain adjustments required after 
acquisition. For example, basis is increased by the cost of 
capital improvements made to the property and decreased by 
depreciation deductions taken with respect to the property.
      A gift or bequest of appreciated (or loss) property is 
not an income tax realization event for the transferor. The 
Code provides special rules for determining a recipient's basis 
in assets received by lifetime gift or from a decedent.
            Basis in property received by lifetime gift
      Under present law, property received from a donor of a 
lifetime gift generally takes a carryover basis. ``Carryover 
basis'' means that the basis in the hands of the donee is the 
same as it was in the hands of the donor. The basis of property 
transferred by lifetime gift also is increased, but not above 
fair market value, by any gift tax paid by the donor. The basis 
of a lifetime gift, however, generally cannot exceed the 
property's fair market value on the date of the gift. If a 
donor's basis in property is greater than the fair market value 
of the property on the date of the gift, then, for purposes of 
determining loss on a subsequent sale of the property, the 
donee's basis is the property's fair market value on the date 
of the gift.
            Basis in property acquired from a decedent
      Property acquired from a decedent's estate generally 
takes a stepped-up basis. ``Stepped-up basis'' means that the 
basis of property acquired from a decedent's estate generally 
is the fair market value on the date of the decedent's death 
(or, if the alternate valuation date is elected, the earlier of 
six months after the decedent's death or the date the property 
is sold or distributed by the estate). Providing a fair market 
value basis eliminates the recognition of income on any 
appreciation of the property that occurred prior to the 
decedent's death and eliminates the tax benefit from any 
unrealized loss.
      In community property states, a surviving spouse's one-
half share of community property held by the decedent and the 
surviving spouse (under the community property laws of any 
State, U.S. possession, or foreign country) generally is 
treated as having passed from the decedent and, thus, is 
eligible for stepped-up basis. Thus, both the decedent's one-
half share and the surviving spouse's one-half share are 
stepped up to fair market value. This rule applies if at least 
one-half of the whole of the community interest is includible 
in the decedent's gross estate.
      Stepped-up basis treatment generally is denied to certain 
interests in foreign entities. Stock in a passive foreign 
investment company (including those for which a mark-to-market 
election has been made) generally takes a carryover basis, 
except that stock of a passive foreign investment company for 
which a decedent shareholder had made a qualified electing fund 
election is allowed a stepped-up basis. Stock owned by a 
decedent in a domestic international sales corporation (or 
former domestic international sales corporation) takes a 
stepped-up basis reduced by the amount (if any) which would 
have been included in gross income under section 995(c) as a 
dividend if the decedent had lived and sold the stock at its 
fair market value on the estate tax valuation date (i.e., 
generally the date of the decedent's death unless an alternate 
valuation date is elected).

                               HOUSE BILL

      The provision doubles the estate and gift tax exemption 
for decedents dying and gifts made after December 31, 2017. 
This is accomplished by increasing the basic exclusion amount 
provided in section 2010(c)(3) of the Code from $5 million to 
$10 million. The $10 million amount is indexed for inflation 
occurring after 2011.
      For estates of decedents dying and generation-skipping 
transfers made after December 31, 2024, the provision repeals 
the estate tax and the generation-skipping transfer tax. The 
provision includes a transition rule for assets placed in a 
qualified domestic trust by a decedent who died before the 
effective date of the provision. Specifically, estate tax will 
not be imposed on: (1) distributions before the death of a 
surviving spouse from the trust more than 10 years after the 
date of enactment; or (2) assets remaining in the qualified 
domestic trust upon the death of the surviving spouse. The top 
marginal gift tax rate is reduced to 35 percent for gifts made 
after December 31, 2024.
      The provision generally retains the present law rules for 
determining the income tax basis of assets acquired by gift and 
assets acquired from a decedent. As a result, property received 
from a donor of a lifetime gift generally will continue to take 
a carryover basis, and property acquired from a decedent's 
estate generally will continue to take a stepped-up basis.
      Effective date.--The doubling of the estate and gift tax 
exemption is effective for estates of decedents dying, 
generation-skipping transfers, and gifts made after December 
31, 2017. The repeal of the estate and generation-skipping 
transfer taxes, and the reduction in the gift tax rate to 35 
percent, are effective for estates of decedents dying, 
generation-skipping transfers, and gifts made after December 
31, 2024.

                            SENATE AMENDMENT

      The provision doubles the estate and gift tax exemption 
for estates of decedents dying and gifts made after December 
31, 2017, and before January 1, 2026. This is accomplished by 
increasing the basic exclusion amount provided in section 
2010(c)(3) of the Code from $5 million to $10 million. The $10 
million amount is indexed for inflation occurring after 2011.
      As a conforming amendment to section 2010(g) (regarding 
computation of estate tax), the provision provides that the 
Secretary shall prescribe regulations as may be necessary or 
appropriate to carry out the purposes of the section with 
respect to differences between the basic exclusion amount in 
effect: (1) at the time of the decedent's death; and (2) at the 
time of any gifts made by the decedent.
      Effective date.--The provision is effective for estates 
of decedents dying and gifts made after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

G. Alternative Minimum Tax (sec. 2001 of the House bill, sec. 12001 of 
       the Senate amendment, and secs. 53 and 55-59 of the Code)

                              PRESENT LAW

Individual alternative minimum tax
            In general
      An alternative minimum tax (``AMT'') is imposed on an 
individual, estate, or trust in an amount by which the 
tentative minimum tax exceeds the regular income tax for the 
taxable year. For taxable years beginning in 2017, the 
tentative minimum tax is the sum of (1) 26 percent of so much 
of the taxable excess as does not exceed $187,800 ($93,900 in 
the case of a married individual filing a separate return) and 
(2) 28 percent of the remaining taxable excess. The breakpoints 
are indexed for inflation. The taxable excess is so much of the 
alternative minimum taxable income (``AMTI'') as exceeds the 
exemption amount. The maximum tax rates on net capital gain and 
dividends used in computing the regular tax are used in 
computing the tentative minimum tax. AMTI is the taxable income 
adjusted to take account of specified tax preferences and 
adjustments.
      The exemption amounts for taxable years beginning in 2017 
are: (1) $84,500 in the case of married individuals filing a 
joint return and surviving spouses; (2) $54,300 in the case of 
other unmarried individuals; (3) $42,250 in the case of married 
individuals filing separate returns; and (4) $24,100 in the 
case of an estate or trust. For taxable years beginning in 
2017, the exemption amounts are phased out by an amount equal 
to 25 percent of the amount by which the individual's AMTI 
exceeds (1) $160,900 in the case of married individuals filing 
a joint return and surviving spouses, (2) $120,700 in the case 
of other unmarried individuals, and (3) $80,450 in the case of 
married individuals filing separate returns or an estate or a 
trust. The amounts are indexed for inflation.
      AMTI is the taxpayer's taxable income increased by 
certain preference items and adjusted by determining the tax 
treatment of certain items in a manner that negates the 
deferral of income resulting from the regular tax treatment of 
those items.
            Preference items in computing AMTI
      The minimum tax preference items are:
      1. The excess of the deduction for percentage depletion 
over the adjusted basis of each mineral property (other than 
oil and gas properties) at the end of the taxable year.
      2. The amount by which excess intangible drilling costs 
(i.e., expenses in excess the amount that would have been 
allowable if amortized over a 10-year period) exceed 65 percent 
of the net income from oil, gas, and geothermal properties. 
This preference applies to independent producers only to the 
extent it reduces the producer's AMTI (determined without 
regard to this preference and the net operating loss deduction) 
by more than 40 percent.
      3. Tax-exempt interest income on private activity bonds 
(other than qualified 501(c)(3) bonds, certain housing bonds, 
and bonds issued in 2009 and 2010) issued after August 7, 1986.
      4. Accelerated depreciation or amortization on certain 
property placed in service before January 1, 1987.
      5. Seven percent of the amount excluded from income under 
section 1202 (relating to gains on the sale of certain small 
business stock).
      In addition, losses from any tax shelter farm activity or 
passive activities are not taken into account in computing 
AMTI.
            Adjustments in computing AMTI
      The adjustments that individuals must make to compute 
AMTI are:
      1. Depreciation on property placed in service after 1986 
and before January 1, 1999, is computed by using the generally 
longer class lives prescribed by the alternative depreciation 
system of section 168(g) and either (a) the straight-line 
method in the case of property subject to the straight-line 
method under the regular tax or (b) the 150-percent declining 
balance method in the case of other property. Depreciation on 
property placed in service after December 31, 1998, is computed 
by using the regular tax recovery periods and the AMT methods 
described in the previous sentence. Depreciation on property 
acquired after September 10, 2001, which is allowed an 
additional allowance under section 168(k) for the regular tax 
is computed without regard to any AMT adjustments.
      2. Mining exploration and development costs are 
capitalized and amortized over a 10-year period.
      3. Taxable income from a long-term contract (other than a 
home construction contract) is computed using the percentage of 
completion method of accounting.
      4. Depreciation on property placed in service after 1986 
and before January 1, 1999, is computed by using the generally 
longer class lives prescribed by the alternative depreciation 
system of section 168(g) and either (a) the straight-line 
method in the case of property subject to the straight-line 
method under the regular tax or (b) the 150-percent declining 
balance method in the case of other property. Depreciation on 
property placed in service after December 31, 1998, is computed 
by using the regular tax recovery periods and the AMT methods 
described in the previous sentence. Depreciation on property 
acquired after September 10, 2001, which is allowed an 
additional allowance under section 168(k) for the regular tax 
is computed without regard to any AMT adjustments.
      5. Mining exploration and development costs are 
capitalized and amortized over a 10-year period.
      6. Taxable income from a long-term contract (other than a 
home construction contract) is computed using the percentage of 
completion method of accounting.
      7. The amortization deduction allowed for pollution 
control facilities placed in service before January 1, 1999 
(generally determined using 60-month amortization for a portion 
of the cost of the facility under the regular tax), is 
calculated under the alternative depreciation system 
(generally, using longer class lives and the straight-line 
method). The amortization deduction allowed for pollution 
control facilities placed in service after December 31, 1998, 
is calculated using the regular tax recovery periods and the 
straight-line method.
      8. Miscellaneous itemized deductions are not allowed.
      9. Itemized deductions for State, local, and foreign real 
property taxes; State and local personal property taxes; State, 
local, and foreign income, war profits, and excess profits 
taxes; and State and local sales taxes are not allowed.
      10. Medical expenses are allowed only to the extent they 
exceed ten percent of the taxpayer's adjusted gross income.
      11. Deductions for interest on home equity loans are not 
allowed.
      12. The standard deduction and the deduction for personal 
exemptions are not allowed.
      13. The amount allowable as a deduction for circulation 
expenditures is capitalized and amortized over a three-year 
period.
      14. The amount allowable as a deduction for research and 
experimentation expenditures from passive activities is 
capitalized and amortized over a 10-year period.
      15. The regular tax rules relating to incentive stock 
options do not apply.
            Other rules
      The taxpayer's net operating loss deduction generally 
cannot reduce the taxpayer's AMTI by more than 90 percent of 
the AMTI (determined without the net operating loss deduction).
      The alternative minimum tax foreign tax credit reduces 
the tentative minimum tax.
      The various nonrefundable business credits allowed under 
the regular tax generally are not allowed against the AMT. 
Certain exceptions apply.
      If an individual is subject to AMT in any year, the 
amount of tax exceeding the taxpayer's regular tax liability is 
allowed as a credit (the ``AMT credit'') in any subsequent 
taxable year to the extent the taxpayer's regular tax liability 
exceeds his or her tentative minimum tax liability in such 
subsequent year. The AMT credit is allowed only to the extent 
that the taxpayer's AMT liability is the result of adjustments 
that are timing in nature. The individual AMT adjustments 
relating to itemized deductions and personal exemptions are not 
timing in nature, and no minimum tax credit is allowed with 
respect to these items.
      An individual may elect to write off certain expenditures 
paid or incurred with respect of circulation expenses, research 
and experimental expenses, intangible drilling and development 
expenditures, development expenditures, and mining exploration 
expenditures over a specified period (three years in the case 
of circulation expenses, 60 months in the case of intangible 
drilling and development expenditures, and 10 years in case of 
other expenditures). The election applies for purposes of both 
the regular tax and the alternative minimum tax.
Corporate alternative minimum tax
            In general
      An AMT is also imposed on a corporation to the extent the 
corporation's tentative minimum tax exceeds its regular tax. 
This tentative minimum tax is computed at the rate of 20 
percent on the AMTI in excess of a $40,000 exemption amount 
that phases out. The exemption amount is phased out by an 
amount equal to 25 percent of the amount that the corporation's 
AMTI exceeds $150,000.
      AMTI is the taxpayer's taxable income increased by 
certain preference items and adjusted by determining the tax 
treatment of certain items in a manner that negates the 
deferral of income resulting from the regular tax treatment of 
those items.
      A corporation with average gross receipts of less than 
$7.5 million for the prior three taxable years is exempt from 
the corporate minimum tax. The $7.5 million threshold is 
reduced to $5 million for the corporation's first three-taxable 
year period.
            Preference items in computing AMTI
      The corporate minimum tax preference items are:
      1. The excess of the deduction for percentage depletion 
over the adjusted basis of the property at the end of the 
taxable year. This preference does not apply to percentage 
depletion allowed with respect to oil and gas properties.
      2. The amount by which excess intangible drilling costs 
arising in the taxable year exceed 65 percent of the net income 
from oil, gas, and geothermal properties. This preference does 
not apply to an independent producer to the extent the 
preference would not reduce the producer's AMTI by more than 40 
percent.
      3. Tax-exempt interest income on private activity bonds 
(other than qualified 501(c)(3) bonds, certain housing bonds, 
and bonds issued in 2009 and 2010) issued after August 7, 1986.
      4. Accelerated depreciation or amortization on certain 
property placed in service before January 1, 1987.
            Adjustments in computing AMTI
      The adjustments that corporations must make in computing 
AMTI are:
      1. Depreciation on property placed in service after 1986 
and before January 1, 1999, must be computed by using the 
generally longer class lives prescribed by the alternative 
depreciation system of section 168(g) and either (a) the 
straight-line method in the case of property subject to the 
straight-line method under the regular tax or (b) the 150-
percent declining balance method in the case of other property. 
Depreciation on property placed in service after December 31, 
1998, is computed by using the regular tax recovery periods and 
the AMT methods described in the previous sentence. 
Depreciation on property which is allowed ``bonus 
depreciation'' for the regular tax is computed without regard 
to any AMT adjustments.
      2. Mining exploration and development costs must be 
capitalized and amortized over a 10-year period.
      3. Taxable income from a long-term contract (other than a 
home construction contract) must be computed using the 
percentage of completion method of accounting.
      4. The amortization deduction allowed for pollution 
control facilities placed in service before January 1, 1999 
(generally determined using 60-month amortization for a portion 
of the cost of the facility under the regular tax), must be 
calculated under the alternative depreciation system 
(generally, using longer class lives and the straight-line 
method). The amortization deduction allowed for pollution 
control facilities placed in service after December 31, 1998, 
is calculated using the regular tax recovery periods and the 
straight-line method.
      5. The special rules applicable to Merchant Marine 
construction funds are not applicable.
      6. The special deduction allowable under section 833(b) 
for Blue Cross and Blue Shield organizations is not allowed.
      7. The adjusted current earnings adjustment applies, as 
described below.
            Adjusted current earning (``ACE'') adjustment
      The adjusted current earnings adjustment is the amount 
equal to 75 percent of the amount by which the adjusted current 
earnings of a corporation exceed its AMTI (determined without 
the ACE adjustment and the alternative tax net operating loss 
deduction). In determining ACE the following rules apply:
      1. For property placed in service before 1994, 
depreciation generally is determined using the straight-line 
method and the class life determined under the alternative 
depreciation system.
      2. Amounts excluded from gross income under the regular 
tax but included for purposes of determining earnings and 
profits are generally included in determining ACE.
      3. The inside build-up of a life insurance contract is 
included in ACE (and the related premiums are deductible).
      4. Intangible drilling costs of integrated oil companies 
must be capitalized and amortized over a 60-month period.
      5. The regular tax rules of section 173 (allowing 
circulation expenses to be amortized) and section 248 (allowing 
organizational expenses to be amortized) do not apply.
      6. Inventory must be calculated using the FIFO, rather 
than LIFO, method.
      7. The installment sales method generally may not be 
used.
      8. No loss may be recognized on the exchange of any pool 
of debt obligations for another pool of debt obligations having 
substantially the same effective interest rates and maturities.
      9. Depletion (other than for oil and gas properties) must 
be calculated using the cost, rather than the percentage, 
method.
      10. In certain cases, the assets of a corporation that 
has undergone an ownership change must be stepped down to their 
fair market values.
            Other rules
      The taxpayer's net operating loss carryover generally 
cannot reduce the taxpayer's AMT liability by more than 90 
percent of AMTI determined without this deduction.
      The various nonrefundable business credits allowed under 
the regular tax generally are not allowed against the AMT. 
Certain exceptions apply.
      If a corporation is subject to AMT in any year, the 
amount of AMT is allowed as an AMT credit in any subsequent 
taxable year to the extent the taxpayer's regular tax liability 
exceeds its tentative minimum tax in the subsequent year. 
Corporations are allowed to claim a limited amount of AMT 
credits in lieu of bonus depreciation.
      A corporation may elect to write off certain expenditures 
paid or incurred with respect of circulation expenses, research 
and experimental expenses, intangible drilling and development 
expenditures, development expenditures, and mining exploration 
expenditures over a specified period (three years in the case 
of circulation expenses, 60 months in the case of intangible 
drilling and development expenditures, and 10 years in case of 
other expenditures). The election applies for purposes of both 
the regular tax and the alternative minimum tax.

                               HOUSE BILL

      The House bill repeals the individual and corporate 
alternative minimum tax.
      The provision allows the AMT credit to offset the 
taxpayer's regular tax liability for any taxable year. In 
addition, the AMT credit is refundable for any taxable year 
beginning after 2018 and before 2023 in an amount equal to 50 
percent (100 percent in the case of taxable years beginning in 
2022) of the excess of the minimum tax credit for the taxable 
year over the amount of the credit allowable for the year 
against regular tax liability. Thus, the full amount of the 
minimum tax credit will be allowed in taxable years beginning 
before 2023.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.
      In determining the alternative minimum taxable income for 
taxable years beginning before January 1, 2018, the net 
operating loss deduction carryback from taxable years beginning 
after December 31, 2017, are determined without regard to any 
AMT adjustments or preferences.
      The repeal of the election to write off certain 
expenditures over a specified period applies to amounts paid or 
incurred after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment temporarily increases both the 
exemption amount and the exemption amount phaseout thresholds 
for the individual AMT. Under the provision, for taxable years 
beginning after December 31, 2017, and beginning before January 
1, 2026, the AMT exemption amount is increased to $109,400 for 
married taxpayers filing a joint return (half this amount for 
married taxpayers filing a separate return), and $70,300 for 
all other taxpayers (other than estates and trusts). The 
phaseout thresholds are increased to $208,400 (half this amount 
for married taxpayers filing a separate return), and $156,300 
for all other taxpayers (other than estates and trusts). These 
amounts are indexed for inflation.
      The provision does not change the corporate alternative 
minimum tax.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement temporarily increases both the 
exemption amount and the exemption amount phaseout thresholds 
for the individual AMT. Under the provision, for taxable years 
beginning after December 31, 2017, and beginning before January 
1, 2026, the AMT exemption amount is increased to $109,400 for 
married taxpayers filing a joint return (half this amount for 
married taxpayers filing a separate return), and $70,300 for 
all other taxpayers (other than estates and trusts). The 
phaseout thresholds are increased to $1,000,000 for married 
taxpayers filing a joint return, and $500,000 for all other 
taxpayers (other than estates and trusts). These amounts are 
indexed for inflation.
      The conference agreement follows the House bill in 
repealing the corporate alternative minimum tax.
      In the case of a corporation, the conference agreement 
allows the AMT credit to offset the regular tax liability for 
any taxable year. In addition, the AMT credit is refundable for 
any taxable year beginning after 2017 and before 2022 in an 
amount equal to 50 percent (100 percent in the case of taxable 
years beginning in 2021) of the excess of the minimum tax 
credit for the taxable year over the amount of the credit 
allowable for the year against regular tax liability. Thus, the 
full amount of the minimum tax credit will be allowed in 
taxable years beginning before 2022.
      Effective date.--The provisions are effective for taxable 
years beginning after December 31, 2017.

H. Elimination of Shared Responsibility Payment for Individuals Failing 
   to Maintain Minimal Essential Coverage (sec. 11081 of the Senate 
                 amendment and sec. 5000A of the Code)

                              PRESENT LAW

      Under the Patient Protection and Affordable Care Act\352\ 
(also called the Affordable Care Act, or ``ACA''), individuals 
must be covered by a health plan that provides at least minimum 
essential coverage or be subject to a tax (also referred to as 
a penalty) for failure to maintain the coverage (commonly 
referred to as the ``individual mandate'').\353\ Minimum 
essential coverage includes government-sponsored programs 
(including Medicare, Medicaid, and CHIP, among others), 
eligible employer-sponsored plans, plans in the individual 
market, grandfathered group health plans and grandfathered 
health insurance coverage, and other coverage as recognized by 
the Secretary of Health and Human Services (``HHS'') in 
coordination with the Secretary of the Treasury.\354\ The tax 
is imposed for any month that an individual does not have 
minimum essential coverage unless the individual qualifies for 
an exemption for the month as described below.
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    \352\ Pub. L. No. 111-148.
    \353\Section 5000A. If an individual is a dependent, as defined in 
section 152, of another taxpayer, the other taxpayer is liable for any 
tax for failure to maintain the required coverage with respect to the 
individual.
    \354\ Sec. 5000A(f). Minimum essential coverage does not include 
coverage that consists of only certain excepted benefits, such as 
limited scope dental and vision benefits or long-term care insurance 
offered under a separate policy, certificate or contract.
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      The tax for any calendar month is one-twelfth of the tax 
calculated as an annual amount. The annual amount is equal to 
the greater of a flat dollar amount or an excess income amount. 
The flat dollar amount is the lesser of (1) the sum of the 
individual annual dollar amounts for the members of the 
taxpayer's family and (2) 300 percent of the adult individual 
dollar amount. The individual adult annual dollar amount is 
$695 for 2017 and 2018.\355\ For an individual who has not 
attained age 18, the individual annual dollar amount is one 
half of the adult amount. The excess income amount is 2.5 
percent of the excess of the taxpayer's household income for 
the taxable year over the threshold amount of income for 
requiring the taxpayer to file an income tax return.\356\ The 
total annual household payment may not exceed the national 
average annual premium for bronze level health plans for the 
applicable family size offered through Exchanges that year.
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    \355\For years after 2016, the $695 amount is indexed to CPI-U, 
rounded to the next lowest multiple of $50.
    \356\ Sec. 6012(a).
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      Exemptions from the requirement to maintain minimum 
essential coverage are provided for the following: (1) an 
individual for whom coverage is unaffordable because the 
required contribution exceeds 8.16\357\ percent of household 
income, (2) an individual with household income below the 
income tax return filing threshold, (3) a member of an Indian 
tribe, (4) a member of certain recognized religious sects or a 
health sharing ministry, (5) an individual with a coverage gap 
for a continuous period of less than three months, and (6) an 
individual who is determined by the Secretary of HHS to have 
suffered a hardship with respect to the capability to obtain 
coverage.\358\
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    \357\ For 2017. The rate applicable for 2018 is 8.06 percent of 
household income.
    \358\In addition, certain individuals present or residing outside 
of the United States and bona fide residents of United States 
territories are deemed to maintain minimum essential coverage.
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                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment reduces the amount of the individual 
responsibility payment, enacted as part of the Affordable Care 
Act, to zero.
      Effective date.--The provision is effective with respect 
to health coverage status for months beginning after December 
31, 2018.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

                          I. Other Provisions

1. Temporarily allow increased contributions to ABLE accounts, and 
        allow contributions to be eligible for saver's credit (sec. 
        11024 of the Senate amendment and sec. 529A of the Code)

                              PRESENT LAW

Qualified ABLE programs
      The Code provides for a tax-favored savings program 
intended to benefit disabled individuals, known as qualified 
ABLE programs.\359\ A qualified ABLE program is a program 
established and maintained by a State or agency or 
instrumentality thereof. A qualified ABLE program must meet the 
following conditions: (1) under the provisions of the program, 
contributions may be made to an account (an ``ABLE account''), 
established for the purpose of meeting the qualified disability 
expenses of the designated beneficiary of the account; (2) the 
program must limit a designated beneficiary to one ABLE 
account; and (3) the program must meet certain other 
requirements discussed below. A qualified ABLE program is 
generally exempt from income tax, but is otherwise subject to 
the taxes imposed on the unrelated business income of tax-
exempt organizations.
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    \359\Sec. 529A.
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      A designated beneficiary of an ABLE account is the owner 
of the ABLE account. A designated beneficiary must be an 
eligible individual (defined below) who established the ABLE 
account and who is designated at the commencement of 
participation in the qualified ABLE program as the beneficiary 
of amounts paid (or to be paid) into and from the program.
      Contributions to an ABLE account must be made in cash and 
are not deductible for Federal income tax purposes. Except in 
the case of a rollover contribution from another ABLE account, 
an ABLE account must provide that it may not receive aggregate 
contributions during a taxable year in excess of the amount 
under section 2503(b) of the Code (the annual gift tax 
exemption). For 2017, this is $14,000.\360\ Additionally, a 
qualified ABLE program must provide adequate safeguards to 
ensure that ABLE account contributions do not exceed the limit 
imposed on accounts under the qualified tuition program of the 
State maintaining the qualified ABLE program. Amounts in the 
account accumulate on a tax-deferred basis (i.e., income on 
accounts under the program is not subject to current income 
tax).
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    \360\This amount is indexed for inflation. In the case that 
contributions to an ABLE account exceed the annual limit, an excise tax 
in the amount of six percent of the excess contribution to such account 
is imposed on the designated beneficiary. Such tax does not apply in 
the event that the trustee of such account makes a corrective 
distribution of such excess amounts by the due date (including 
extensions) of the individual's tax return for the year within the 
taxable year.
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      A qualified ABLE program may permit a designated 
beneficiary to direct (directly or indirectly) the investment 
of any contributions (or earnings thereon) no more than two 
times in any calendar year and must provide separate accounting 
for each designated beneficiary. A qualified ABLE program may 
not allow any interest in the program (or any portion thereof) 
to be used as security for a loan.
      Distributions from an ABLE account are generally 
includible in the distributee's income to the extent consisting 
of earnings on the account.\361\ Distributions from an ABLE 
account are excludible from income to the extent that the total 
distribution does not exceed the qualified disability expenses 
of the designated beneficiary during the taxable year. If a 
distribution from an ABLE account exceeds the qualified 
disability expenses of the designated beneficiary, a pro rata 
portion of the distribution is excludible from income. The 
portion of any distribution that is includible in income is 
subject to an additional 10-percent tax unless the distribution 
is made after the death of the beneficiary. Amounts in an ABLE 
account may be rolled over without income tax liability to 
another ABLE account for the same beneficiary\362\ or another 
ABLE account for the designated beneficiary's brother, sister, 
stepbrother or stepsister who is also an eligible individual.
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    \361\ The rules of section 72 apply in determining the portion of a 
distribution that consists of earnings.
    \362\For instance, if a designated beneficiary were to relocate to 
a different State.
---------------------------------------------------------------------------
      Except in the case of an ABLE account established in a 
different ABLE program for purposes of transferring ABLE 
accounts,\363\ no more than one ABLE account may be established 
by a designated beneficiary. Thus, once an ABLE account has 
been established by a designated beneficiary, no account 
subsequently established by such beneficiary shall be treated 
as an ABLE account.
---------------------------------------------------------------------------
    \363\In which case the contributor ABLE account must be closed 60 
days after the transfer to the new ABLE account is made.
---------------------------------------------------------------------------
      A contribution to an ABLE account is treated as a 
completed gift of a present interest to the designated 
beneficiary of the account. Such contributions qualify for the 
per-donee annual gift tax exclusion ($14,000 for 2017) and, to 
the extent of such exclusion, are exempt from the generation 
skipping transfer (``GST'') tax. A distribution from an ABLE 
account generally is not subject to gift tax or GST tax.
            Eligible individuals
      As described above, a qualified ABLE program may provide 
for the establishment of ABLE accounts only if those accounts 
are established and owned by an eligible individual, such owner 
referred to as a designated beneficiary. For these purposes, an 
eligible individual is an individual either (1) for whom a 
disability certification has been filed with the Secretary for 
the taxable year, or (2) who is entitled to Social Security 
Disability Insurance benefits or SSI benefits\364\ based on 
blindness or disability, and such blindness or disability 
occurred before the individual attained age 26.
---------------------------------------------------------------------------
    \364\These are benefits, respectively, under Title II or Title XVI 
of the Social Security Act.
---------------------------------------------------------------------------
      A disability certification means a certification to the 
satisfaction of the Secretary, made by the eligible individual 
or the parent or guardian of the eligible individual, that the 
individual has a medically determinable physical or mental 
impairment, which results in marked and severe functional 
limitations, and which can be expected to result in death or 
which has lasted or can be expected to last for a continuous 
period of not less than 12 months, or is blind (within the 
meaning of section 1614(a)(2) of the Social Security Act). Such 
blindness or disability must have occurred before the date the 
individual attained age 26. Such certification must include a 
copy of the diagnosis of the individual's impairment and be 
signed by a licensed physician.\365\
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    \365\No inference may be drawn from a disability certification for 
purposes of eligibility for Social Security, SSI or Medicaid benefits.
---------------------------------------------------------------------------
            Qualified disability expenses
      As described above, the earnings on distributions from an 
ABLE account are excluded from income only to the extent total 
distributions do not exceed the qualified disability expenses 
of the designated beneficiary. For this purpose, qualified 
disability expenses are any expenses related to the eligible 
individual's blindness or disability which are made for the 
benefit of the designated beneficiary. Such expenses include 
the following expenses: education, housing, transportation, 
employment training and support, assistive technology and 
personal support services, health, prevention and wellness, 
financial management and administrative services, legal fees, 
expenses for oversight and monitoring, funeral and burial 
expenses, and other expenses, which are approved by the 
Secretary under regulations and consistent with the purposes of 
section 529A.
            Transfer to State
      In the event that the designated beneficiary dies, 
subject to any outstanding payments due for qualified 
disability expenses incurred by the designated beneficiary, all 
amounts remaining in the deceased designated beneficiary's ABLE 
account not in excess of the amount equal to the total medical 
assistance paid such individual under any State Medicaid plan 
established under title XIX of the Social Security Act shall be 
distributed to such State upon filing of a claim for payment by 
such State. Such repaid amounts shall be net of any premiums 
paid from the account or by or on behalf of the beneficiary to 
the State's Medicaid Buy-In program.
            Treatment of ABLE accounts under Federal programs
      Any amounts in an ABLE account, and any distribution for 
qualified disability expenses, shall be disregarded for 
purposes of determining eligibility to receive, or the amount 
of, any assistance or benefit authorized by any Federal means-
tested program. However, in the case of the SSI program, a 
distribution for housing expenses is not disregarded, nor are 
amounts in an ABLE account in excess of $100,000. In the case 
that an individual's ABLE account balance exceeds $100,000, 
such individual's SSI benefits shall not be terminated, but 
instead shall be suspended until such time as the individual's 
resources fall below $100,000. However, such suspension shall 
not apply for purposes of Medicaid eligibility.
Saver's credit
      Present law provides a nonrefundable tax credit for 
eligible taxpayers for qualified retirement savings 
contributions.\366\ The maximum annual contribution eligible 
for the credit is $2,000 per individual. The credit rate 
depends on the adjusted gross income (``AGI'') of the taxpayer. 
For this purpose, AGI is determined without regard to certain 
excludable foreign-source earned income and certain U.S. 
possession income.
---------------------------------------------------------------------------
    \366\Sec. 25B.
---------------------------------------------------------------------------
      For taxable years beginning in 2017, married taxpayers 
filing joint returns with AGI of $61,500 or less, taxpayers 
filing head of household returns with AGI of $46,125 or less, 
and all other taxpayers filing returns with AGI of $30,750 or 
less are eligible for the credit. As the taxpayer's AGI 
increases, the credit rate available to the taxpayer is 
reduced, until, at certain AGI levels, the credit is 
unavailable. The credit rates based on AGI for taxable years 
beginning in 2016 are provided in the table below. The AGI 
levels used for the determination of the available credit rate 
are indexed for inflation.

                                    TABLE 3.--CREDIT RATES FOR SAVER'S CREDIT
----------------------------------------------------------------------------------------------------------------
             Joint Filers                Heads of Households        All Other Filers           Credit Rate
----------------------------------------------------------------------------------------------------------------
$0-$37,000...........................  $0-$27,750.............  $0-$18,500.............  50 percent
$37,001-$40,000......................  $27,751-$30,000........  $18,501-$20,000........  20 percent
$40,001-$62,000......................  $30,001-$46,500........  $20,001-$31,000........  10 percent
Over $62,000.........................  Over $46,500...........  Over $31,000...........  0 percent
----------------------------------------------------------------------------------------------------------------

      The saver's credit is in addition to any deduction or 
exclusion that would otherwise apply with respect to the 
contribution. The credit offsets alternative minimum tax 
liability as well as regular tax liability. The credit is 
available to individuals who are 18 years old or older, other 
than individuals who are full-time students or claimed as a 
dependent on another taxpayer's return.
      Qualified retirement savings contributions consist of (1) 
elective deferrals to a section 401(k) plan, a section 403(b) 
plan, a governmental section 457 plan, a SIMPLE plan, or a 
SARSEP; (2) contributions to a traditional or Roth IRA; and (3) 
voluntary after-tax employee contributions to a qualified 
retirement plan or section 403(b) plan. Under the rules 
governing these arrangements, an individual's contribution to 
the arrangement generally cannot exceed the lesser of an annual 
dollar amount (for example, in 2017, $5,500 in the case of an 
IRA of an individual under age 50) or the individual's 
compensation that is includible in income. In the case of IRA 
contributions of a married couple, the combined includible 
compensation of both spouses may be taken into account.
      The amount of any contribution eligible for the credit is 
reduced by distributions received by the taxpayer (or by the 
taxpayer's spouse if the taxpayer files a joint return with the 
spouse) from any retirement plan to which eligible 
contributions can be made during the taxable year for which the 
credit is claimed, during the two taxable years prior to the 
year for which the credit is claimed, and during the period 
after the end of the taxable year for which the credit is 
claimed and prior to the due date (including extensions) for 
filing the taxpayer's return for the year. Distributions that 
are rolled over to another retirement plan do not affect the 
credit.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment temporarily increases the 
contribution limitation to ABLE accounts under certain 
circumstances. While the general overall limitation on 
contributions (the per-donee annual gift tax exclusion ($14,000 
for 2017)) remains the same, the limitation is temporarily 
increased with respect to contributions made by the designated 
beneficiary of the ABLE account. Under the temporary provision, 
after the overall limitation on contributions is reached, an 
ABLE account's designated beneficiary may contribute an 
additional amount, up to the lesser of (a) the Federal poverty 
line for a one-person household; or (b) the individual's 
compensation for the taxable year.
      Additionally, the provision temporarily allows a 
designated beneficiary of an ABLE account to claim the saver's 
credit for contributions made to his or her ABLE account.
      The provision does not apply to taxable years after 
December 31, 2025.
      Effective date.--The provision is effective for taxable 
years beginning after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
      Effective date.--The provision is effective for taxable 
years beginning after the date of enactment of this Act.
2. Extension of time limit for contesting IRS levy (sec. 11071 of the 
        Senate amendment and secs. 6343 and 6532 of the Code)

                              PRESENT LAW

      The IRS is authorized to return property that has been 
wrongfully levied upon.\367\ In general, monetary proceeds from 
the sale of levied property may be returned within nine months 
of the date of the levy.
---------------------------------------------------------------------------
    \367\Sec. 6343.
---------------------------------------------------------------------------
      Generally, any person (other than the person against whom 
is assessed the tax out of which such levy arose) who claims an 
interest in levied property and that such property was 
wrongfully levied upon may bring a civil action for wrongful 
levy in a district court of the United States.\368\ Generally, 
an action for wrongful levy must be brought within nine months 
from the date of levy.\369\
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    \368\Sec. 7426.
    \369\Sec. 6532.
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                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision extends from nine months to two years the 
period for returning the monetary proceeds from the sale of 
property that has been wrongfully levied upon.
      The provision also extends from nine months to two years 
the period for bringing a civil action for wrongful levy.
      Effective date.--The provision is effective with respect 
to: (1) levies made after the date of enactment; and (2) levies 
made on or before the date of enactment provided that the nine-
month period has not expired as of the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
3. Treatment of certain individuals performing services in the Sinai 
        Peninsula of Egypt (sec. 11026 of the Senate amendment and 
        secs. 2, 112, 692, 2201, 3401, 4253, 6013, and 7508 of the 
        Code)

                              PRESENT LAW

      Members of the Armed Forces serving in a combat zone are 
afforded a number of tax benefits. These include:
            1.  An exclusion from gross income of certain 
        military pay received for any month during which the 
        member served in a combat zone or was hospitalized as a 
        result of serving in a combat zone;\370\
---------------------------------------------------------------------------
    \370\Sec. 112; see also, sec. 3401(a)(1), exempting such income 
from wage withholding.
---------------------------------------------------------------------------
            2.  An exemption from taxes on death while serving 
        in combat zone or dying as a result of wounds, disease, 
        or injury incurred while so serving;\371\
---------------------------------------------------------------------------
    \371\Sec. 692.
---------------------------------------------------------------------------
            3.  Special estate tax rules where death occurs in 
        a combat zone;\372\
---------------------------------------------------------------------------
    \372\Sec. 2201.
---------------------------------------------------------------------------
            4.  Special benefits to surviving spouses in the 
        event of a service member's death or missing 
        status;\373\
---------------------------------------------------------------------------
    \373\Secs. 2(a)(3) and 6013(f)(1).
---------------------------------------------------------------------------
            5.  An extension of time limits governing the 
        filing of returns and other rules regarding timely 
        compliance with Federal income tax rules;\374\ and
---------------------------------------------------------------------------
    \374\Sec. 7508.
---------------------------------------------------------------------------
            6.  An exclusion from telephone excise taxes.\375\
---------------------------------------------------------------------------
    \375\Sec. 4253(d).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision grants combat zone tax benefits to the 
Sinai Peninsula of Egypt, if as of the date of enactment of the 
provision any member of the Armed Forces of the United States 
is entitled to special pay under section 310 of title 37, 
United States Code (relating to special pay; duty subject to 
hostile fire or imminent danger), for services performed in 
such location. This benefit lasts only during the period such 
entitlement is in effect but not later than taxable years 
beginning before January 1, 2026.
      Effective date.--The provision is generally effective 
beginning June 9, 2015. The portion of the provision related to 
wage withholding applies to remuneration paid after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
4. Modifications of user fees requirements for installment agreements 
        (sec. 11073 of the Senate amendment and new sec. 6159(f) of the 
        Code)

                              PRESENT LAW

      The Code authorizes the IRS to enter into written 
agreements with any taxpayer under which the taxpayer agrees to 
pay taxes owed, as well as interest and penalties, in 
installments over an agreed schedule, if the IRS determines 
that doing so will facilitate collection of the amounts owed. 
This agreement provides for a period during which payments may 
be made and while other IRS enforcement actions are held in 
abeyance.\376\ An installment agreement generally does not 
reduce the amount of taxes, interest, or penalties owed. 
However, the IRS is authorized to enter into installment 
agreements with taxpayers which do not provide for full payment 
of the taxpayer's liability over the life of the agreement. The 
IRS is required to review such partial payment installment 
agreements at least every two years to determine whether the 
financial condition of the taxpayer has significantly changed 
so as to warrant an increase in the value of the payments being 
made.
---------------------------------------------------------------------------
    \376\Sec. 6331(k).
---------------------------------------------------------------------------
      Taxpayers can request an installment agreement by filing 
Form 9465, Installment Agreement Request.\377\ If the request 
for an installment agreement is approved by the IRS, the IRS 
charges a user fee.\378\ The IRS currently charges $225 for 
entering into an installment agreement.\379\ If the application 
is for a direct debit installment agreement, whereby the 
taxpayer authorizes the IRS to request the monthly electronic 
transfer of funds from the taxpayer's bank account to the IRS, 
the fee is reduced to $107.\380\ In addition, regardless of the 
method of payment, the fee is $43 for low-income 
taxpayers.\381\ For this purpose, low-income is defined as a 
person who falls below 250 percent of the Federal poverty 
guidelines published annually. Finally, there is no user fee if 
the agreement qualifies for a short term agreement (120 days or 
less).
---------------------------------------------------------------------------
    \377\The IRS accepts applications for installment agreements 
online, from individuals and businesses, if the total tax, penalties 
and interest is below $50,000 for the former, and $25,000 for the 
latter.
    \378\31 U.S.C. sec. 9701; Treas. reg. sec. 300.1; The Independent 
Offices Appropriations Act of 1952 (IOAA) 65 Stat. B70 (June 27, 1951). 
A discussion of the IRS practice regarding user fees and a list of 
actions for which fees are charged is included in the Internal Revenue 
Manual. See ``User Fees,'' paragraph 1.32.19 IRM, available at https://
www.irs.gov/irm/part1/irm_01-035-019.
    \379\Treas. reg. sec. 300.1.
    \380\Ibid.
    \381\Ibid.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision generally prohibits increases in the amount 
of user fees charged by the IRS for installment agreements. For 
low-income taxpayers (those whose income falls below 250 
percent of the Federal poverty guidelines), it alleviates the 
user fee requirement in two ways. First, it waives the user fee 
if the low-income taxpayer enters into an installment agreement 
under which the taxpayer agrees to make automated installment 
payments through a debit account. Second, it provides that low-
income taxpayers who are unable to agree to make payments 
electronically remain subject to the required user fee, but the 
fee is reimbursed upon completion of the installment agreement.
      Effective date.--The provision is effective for 
agreements entered into on or after the date that is 60 days 
after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
5. Relief for 2016 disaster areas (sec. 11029 of the Senate amendment 
        and secs. 72(t), 165, 401-403, 408, 457, and 3405 of the Code)

                              PRESENT LAW

Distributions from tax-favored retirement plans
      A distribution from a qualified retirement plan, a tax-
sheltered annuity plan (a ``section 403(b) plan''), an eligible 
deferred compensation plan of a State or local government 
employer (a ``governmental section 457(b) plan''), or an 
individual retirement arrangement (an ``IRA'') generally is 
included in income for the year distributed.\382\ These plans 
are referred to collectively as ``eligible retirement plans.'' 
In addition, unless an exception applies, a distribution from a 
qualified retirement plan, a section 403(b) plan, or an IRA 
received before age 59\1/2\ is subject to a 10-percent 
additional tax (referred to as the ``early withdrawal tax'') on 
the amount includible in income.\383\
---------------------------------------------------------------------------
    \382\Secs. 401(a), 403(a), 403(b), 457(b) and 408. Under section 
3405, distributions from these plans are generally subject to income 
tax withholding unless the recipient elects otherwise. In addition, 
certain distributions from a qualified retirement plan, a section 
403(b) plan, or a governmental section 457(b) plan are subject to 
mandatory income tax withholding at a 20-percent rate unless the 
distribution is rolled over.
    \383\Sec. 72(t). Under present law, the 10-percent early withdrawal 
tax does not apply to distributions from a governmental section 457(b) 
plan.
---------------------------------------------------------------------------
      In general, a distribution from an eligible retirement 
plan may be rolled over to another eligible retirement plan 
within 60 days, in which case the amount rolled over generally 
is not includible in income. The IRS has the authority to waive 
the 60-day requirement if failure to waive the requirement 
would be against equity or good conscience, including cases of 
casualty, disaster or other events beyond the reasonable 
control of the individual.
      The terms of a qualified retirement plan, section 403(b) 
plan, or governmental section 457(b) plan generally determine 
when distributions are permitted. However, in some cases, 
restrictions may apply to distribution before an employee's 
termination of employment, referred to as ``in-service'' 
distributions. Despite such restrictions, an in-service 
distribution may be permitted in the case of financial hardship 
or an unforeseeable emergency.
      Tax-favored retirement plans are generally required to be 
operated in accordance with the terms of the plan document, and 
amendments to reflect changes to the plan generally must be 
adopted within a limited period.
Itemized deduction for casualty losses
      A taxpayer may generally claim a deduction for any loss 
sustained during the taxable year and not compensated by 
insurance or otherwise.\384\ For individual taxpayers, 
deductible losses must be incurred in a trade or business or 
other profit-seeking activity or consist of property losses 
arising from fire, storm, shipwreck, or other casualty, or from 
theft. Personal casualty or theft losses are deductible only if 
they exceed $100 per casualty or theft. In addition, aggregate 
net casualty and theft losses are deductible only to the extent 
they exceed 10 percent of an individual taxpayer's adjusted 
gross income.
---------------------------------------------------------------------------
    \384\Sec. 165.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      The provision provides tax relief, as described below, 
relating to a ``2016 disaster area,'' defined as any area with 
respect to which a major disaster was declared by the President 
under section 401 of the Robert T. Stafford Disaster Relief and 
Emergency Assistance Act during calendar year 2016.
Distributions from eligible retirement plans
      Under the provision, an exception to the 10-percent early 
withdrawal tax applies in the case of a qualified 2016 disaster 
distribution from a qualified retirement plan, a section 403(b) 
plan or an IRA. In addition, as discussed further, income 
attributable to a qualified 2016 disaster distribution may be 
included in income ratably over three years, and the amount of 
a qualified 2016 disaster distribution may be recontributed to 
an eligible retirement plan within three years.
      A qualified 2016 disaster distribution is a distribution 
from an eligible retirement plan made on or after January 1, 
2016, and before January 1, 2018, to an individual whose 
principal place of abode at any time during calendar year 2016 
was located in a 2016 disaster area and who has sustained an 
economic loss by reason of the events giving rise to the 
Presidential disaster declaration.
      The total amount of distributions to an individual from 
all eligible retirement plans that may be treated as qualified 
2016 disaster distributions is $100,000. Thus, any 
distributions in excess of $100,000 during the applicable 
period are not qualified 2016 disaster distributions.
      Any amount required to be included in income as a result 
of a qualified 2016 disaster is included in income ratably over 
the three-year period beginning with the year of distribution 
unless the individual elects not to have ratable inclusion 
apply.
      Any portion of a qualified 2016 disaster distribution 
may, at any time during the three-year period beginning the day 
after the date on which the distribution was received, be 
recontributed to an eligible retirement plan to which a 
rollover can be made. Any amount recontributed within the 
three-year period is treated as a rollover and thus is not 
includible in income. For example, if an individual receives a 
qualified 2016 disaster distribution in 2016, that amount is 
included in income, generally ratably over the year of the 
distribution and the following two years, but is not subject to 
the 10-percent early withdrawal tax. If, in 2018, the amount of 
the qualified 2016 disaster distribution is recontributed to an 
eligible retirement plan, the individual may file an amended 
return to claim a refund of the tax attributable to the amount 
previously included in income. In addition, if, under the 
ratable inclusion provision, a portion of the distribution has 
not yet been included in income at the time of the 
contribution, the remaining amount is not includible in income.
      A qualified 2016 disaster distribution is a permissible 
distribution from a qualified retirement plan, section 403(b) 
plan, or governmental section 457(b) plan, regardless of 
whether a distribution otherwise would be permissible.\385\ A 
plan is not treated as violating any Code requirement merely 
because it treats a distribution as a qualified 2016 disaster 
distribution, provided that the aggregate amount of such 
distributions from plans maintained by the employer and members 
of the employer's controlled group or affiliated service group 
does not exceed $100,000. Thus, a plan is not treated as 
violating any Code requirement merely because an individual 
might receive total distributions in excess of $100,000, taking 
into account distributions from plans of other employers or 
IRAs.
---------------------------------------------------------------------------
    \385\A qualified 2016 disaster distributions is subject to income 
tax withholding unless the recipient elects otherwise. Mandatory 20-
percent withholding does not apply.
---------------------------------------------------------------------------
      A plan amendment made pursuant to the provision (or a 
regulation issued thereunder) may be retroactively effective 
if, in addition to the requirements described below, the 
amendment is made on or before the last day of the first plan 
year beginning after December 31, 2018 (or in the case of a 
governmental plan, December 31, 2020), or a later date 
prescribed by the Secretary. In addition, the plan will be 
treated as operated in accordance with plan terms during the 
period beginning with the date the provision or regulation 
takes effect (or the date specified by the plan if the 
amendment is not required by the provision or regulation) and 
ending on the last permissible date for the amendment (or, if 
earlier, the date the amendment is adopted). In order for an 
amendment to be retroactively effective, it must apply 
retroactively for that period, and the plan must be operated in 
accordance with the amendment during that period.
Modification of rules related to casualty losses
      Under the provision, in the case of a personal casualty 
loss which arose on or after January 1, 2016, in a 2016 
disaster area and was attributable to the events giving rise to 
the Presidential disaster declaration, such losses are 
deductible without regard to whether aggregate net losses 
exceed ten percent of a taxpayer's adjusted gross income. Under 
the provision, in order to be deductible, the losses must 
exceed $500 per casualty. Additionally, such losses may be 
claimed in addition to the standard deduction.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with a clarification that casualty loss relief applies to 
losses arising in taxable years beginning after December 31, 
2015, and before January 1, 2018.
6. Attorneys' fees relating to awards to whistleblowers (sec. 11078 of 
        the Senate amendment and sec. 62(a)(21) of the Code)

                              PRESENT LAW

      The Code provides an above-the-line deduction for 
attorneys' fees and costs paid by, or on behalf of, the 
taxpayer in connection with any action involving a claim of 
unlawful discrimination, certain claims against the Federal 
Government, or a private cause of action under the Medicare 
Secondary Payer statute.\386\ The amount that may be deducted 
above-the-line may not exceed the amount includible in the 
taxpayer's gross income for the taxable year on account of a 
judgment or settlement (whether by suit or agreement and 
whether as lump sum or periodic payments) resulting from such 
claim. Additionally, the Code provides an above-the-line 
deduction for attorneys' fees and costs paid by, or on behalf 
of, the individual in connection with any award for providing 
information regarding violations of the tax laws.\387\ The 
amount that may be deducted above-the-line may not exceed the 
amount includible in the taxpayer's gross income for the 
taxable year on account of such award.\388\
---------------------------------------------------------------------------
    \386\Secs. 62(a)(20) and (e). Section 62(e) defines ``unlawful 
discrimination'' to include a number of specific statutes, any federal 
whistle-blower statute, and any federal, state, or local law 
``providing for the enforcement of civil rights'' or ``regulating any 
aspect of the employment relationship . . . or prohibiting the 
discharge of an employee, the discrimination against an employee, or 
any other form of retaliation or reprisal against an employee for 
asserting rights or taking other actions permitted by law.''
    \387\Secs. 7623 and 62(a)(21).
    \388\Secs. 7623 and 62(a)(21).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides an above-the-line deduction for 
attorney fees and court costs paid by, or on behalf of, the 
taxpayer in connection with any action involving a claim under 
State False Claim Acts, the SEC whistleblower program,\389\ and 
the Commodity Future Trading Commission whistleblower 
program.\390\
---------------------------------------------------------------------------
    \389\15 U.S.C. secs. 78u-6 and 78u-7.
    \390\7 U.S.C. sec. 26.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
7. Clarification of whistleblower awards (sec. 11079 of the Senate 
        amendment and new sec. 7623(c) of the Code)

                              PRESENT LAW

Awards to whistleblowers
      The Code authorizes the IRS to pay such sums as deemed 
necessary for: ``(1) detecting underpayments of tax; or (2) 
detecting and bringing to trial and punishment persons guilty 
of violating the internal revenue laws or conniving at the 
same.''\391\ Generally, amounts are paid based on a percentage 
of proceeds collected based on the information provided.
---------------------------------------------------------------------------
    \391\Sec. 7623.
---------------------------------------------------------------------------
      The Tax Relief and Health Care Act of 2006 (the 
``Act'')\392\ established an enhanced reward program for 
actions in which the tax, penalties, interest, additions to 
tax, and additional amounts in dispute exceed $2,000,000 and, 
if the taxpayer is an individual, the individual's gross income 
exceeds $200,000 for any taxable year in issue. In such cases, 
the award is calculated to be at least 15 percent but not more 
than 30 percent of collected proceeds (including penalties, 
interest, additions to tax, and additional amounts).
---------------------------------------------------------------------------
    \392\Pub. L. No. 109-432.
---------------------------------------------------------------------------
      The Act permits an individual to appeal the amount or a 
denial of an award determination to the United States Tax Court 
(the ``Tax Court'') within 30 days of such determination. Tax 
Court review of an award determination may be assigned to a 
special trial judge.
Rules relating to taxpayers with foreign assets
      U.S. persons who transfer assets to, and hold interests 
in, foreign bank accounts or foreign entities may be subject to 
self-reporting requirements under both the Foreign Account Tax 
Compliance Act provisions in the Code and the provisions in the 
Bank Secrecy Act and its underlying regulations (which provide 
for FinCEN Form 114, Report of Foreign Bank and Financial 
Accounts, the ``FBAR''), as discussed below. Amounts recovered 
for violations of FATCA provisions in the Code may be 
considered for purposes of computing a whistleblower award 
under the Code. However, the IRS has found that amounts 
recovered for violations of non-tax laws, including the 
provisions of the Bank Secrecy Act (and FBAR) for which the IRS 
has delegated authority, may not be considered for purposes of 
computing an award under the Code.\393\
---------------------------------------------------------------------------
    \393\Chief Counsel Memorandum, ``Scope of Awards Payable Under 
I.R.C. section 7623,'' April 23, 2012, available at http://www.tax-
whistleblower.com/resources/PMTA-2012-10.pdf. Under Title 31, ``[t]he 
Secretary may pay a reward to an individual who provides original 
information which leads to a recovery of a criminal fine, civil 
penalty, or forfeiture, which exceeds $50,000, for a violation of 
[chapter 53 of Title 31]. The Secretary shall determine the amount of a 
reward . . . [and] . . . may not award more than 25 per centum of the 
net amount of the fine, penalty, or forfeiture collected or $150,000, 
whichever is less.'' 31 U.S.C. Sec. 5323.
---------------------------------------------------------------------------
            Foreign Account Tax Compliance Act (``FATCA'')
      The Code imposes a withholding and reporting regime for 
U.S. persons engaged in foreign activities, directly or 
indirectly, through a foreign business entity.\394\ This regime 
for outbound payments,\395\ commonly referred to as the Foreign 
Account Tax Compliance Act (``FATCA''),\396\ imposes a 
withholding tax of 30 percent of the gross amount of certain 
payments to foreign financial institutions (``FFIs'') unless 
the FFI establishes that it is compliant with the information 
reporting requirements of FATCA which include identifying 
certain U.S. accounts held in the FFI. An FFI must report with 
respect to a U.S. account (1) the name, address, and taxpayer 
identification number of each U.S. person holding an account or 
a foreign entity with one or more substantial U.S. owners 
holding an account; (2) the account number; (3) the account 
balance or value; and (4) except as provided by the Secretary, 
the gross receipts, including from dividends and interest, and 
gross withdrawals or payments from the account.\397\
---------------------------------------------------------------------------
    \394\See, e.g., secs. 6038, 6038B, and 6046.
    \395\Hiring Incentives to Restore Employment Act of 2010, Pub. L. 
No. 111-147.
    \396\Foreign Account Tax Compliance Act of 2009 is the name of the 
House and Senate bills in which the provisions first appeared. See H.R. 
3933 and S. 1934 (October 27, 2009).
    \397\Sec. 1471(c).
---------------------------------------------------------------------------
      Individuals are required to disclose with their annual 
Federal income tax return any interest in foreign accounts and 
certain foreign securities if the aggregate value of such 
assets is in excess of the greater of $50,000 or an amount 
determined by the Secretary in regulations. Failure to do so is 
punishable by a penalty of $10,000, which may increase for each 
30-day period during which the failure continues after 
notification by the IRS, up to a maximum penalty of 
$50,000.\398\
---------------------------------------------------------------------------
    \398\Sec. 6038D. Guidance on the scope of reporting required, the 
threshold values triggering reporting requirements for various fact 
patterns and how the value of assets is to be determined is found in 
Treas. Reg. secs. 1.6038D-1 to 1.6038D-8.
---------------------------------------------------------------------------
            Report of Foreign Bank and Financial Accounts (the 
                    ``FBAR'')
      In addition to the reporting requirements under the Code, 
U.S. persons who transfer assets to, and hold interests in, 
foreign bank accounts or foreign entities may be subject to 
self-reporting requirements under the Bank Secrecy Act.\399\
---------------------------------------------------------------------------
    \399\Bank Secrecy Act, 31 U.S.C. secs. 5311-5332.
---------------------------------------------------------------------------
      The Bank Secrecy Act imposes reporting obligations on 
both financial institutions and account holders. With respect 
to account holders, a U.S. citizen, resident, or person doing 
business in the United States is required to keep records and 
file reports, as specified by the Secretary, when that person 
enters into a transaction or maintains an account with a 
foreign financial agency.\400\ Regulations promulgated pursuant 
to broad regulatory authority granted to the Secretary in the 
Bank Secrecy Act\401\ provide additional guidance regarding the 
disclosure obligation with respect to foreign accounts.
---------------------------------------------------------------------------
    \400\31 U.S.C. sec. 5314. The term ``agency'' in the Bank Secrecy 
Act includes financial institutions.
    \401\31 U.S.C. sec. 5314(a) provides: ``Considering the need to 
avoid impeding or controlling the export or import of monetary 
instruments and the need to avoid burdening unreasonably a person 
making a transaction with a foreign financial agency, the Secretary of 
the Treasury shall require a resident or citizen of the United States 
or a person in, and doing business in, the United States, to keep 
records, file reports, or keep records and file reports, when the 
resident, citizen, or person makes a transaction or maintains a 
relation for any person with a foreign financial agency.''
---------------------------------------------------------------------------
      The FBAR must be filed by June 30\402\ of the year 
following the year in which the $10,000 filing threshold is 
met.\403\ Failure to file the FBAR is subject to both 
criminal\404\ and civil penalties.\405\ Willful failure to file 
an FBAR may be subject to penalties in amounts not to exceed 
the greater of $100,000 or 50 percent of the amount in the 
account at the time of the violation.\406\ A non-willful, but 
negligent, failure to file is subject to a penalty of $10,000 
for each negligent violation.\407\ The penalty may be waived if 
(1) there is reasonable cause for the failure to report and (2) 
the amount of the transaction or balance in the account was 
properly reported. In addition, serious violations are subject 
to criminal prosecution, potentially resulting in both monetary 
penalties and imprisonment. Civil and criminal sanctions are 
not mutually exclusive.
---------------------------------------------------------------------------
    \402\The Surface Transportation and Veterans Health Care Choice 
Improvement Act of 2015, Pub. L. No. 114-41, changed the filing date 
for FinCEN Form 114 from June 30 to April 15 (with a maximum extension 
for a 6-month period ending on October 15 and with provision for an 
extension under rules similar to the rules in Treas. Reg. section 
1.6081-5) for tax returns for taxable years beginning after December 
31, 2015.
    \403\31 C.F.R. sec. 103.27(c). The $10,000 threshold is the 
aggregate value of all foreign financial accounts in which a U.S. 
person has a financial interest or over which the U.S. person has 
signature or other authority.
    \404\31 U.S.C. sec. 5322 (failure to file is punishable by a fine 
up to $250,000 and imprisonment for five years, which may double if the 
violation occurs in conjunction with certain other violations).
    \405\31 U.S.C. sec. 5321(a)(5).
    \406\31 U.S.C. sec. 5321(a)(5)(C).
    \407\31 U.S.C. sec. 5321(a)(5)(B)(i), (ii).
---------------------------------------------------------------------------
FBAR enforcement responsibility
      Until 2003, the Financial Crimes Enforcement Network 
(``FinCEN''), an agency of the Department of the Treasury, had 
exclusive responsibility for civil penalty enforcement of FBAR, 
although administration of the FBAR reporting regime was 
delegated to the IRS.\408\ As a result, persons who were more 
than 180 days delinquent in paying any FBAR penalties were 
referred for collection action to the Financial Management 
Service of the Treasury Department, which is responsible for 
such non-tax collections.\409\ Continued nonpayment resulted in 
a referral to the Department of Justice for institution of 
court proceedings against the delinquent person. In 2003, the 
Secretary delegated FBAR civil enforcement authority to the 
IRS.\410\ The authority delegated to the IRS in 2003 included 
the authority to determine and enforce civil penalties,\411\ as 
well as to revise the form and instructions. However, the Bank 
Secrecy Act does not include collection powers similar to those 
available for enforcement of the tax laws under the Code. As a 
consequence, FBAR civil penalties remain collectible only in 
accord with the procedures for non-tax collection described 
above.
---------------------------------------------------------------------------
    \408\Treas. Directive 15-14 (December 1, 1992), in which the 
Secretary delegated to the IRS authority to investigate violations of 
the Bank Secrecy Act. If the IRS Criminal Investigation Division 
declines to pursue a possible criminal case, it is to refer the matter 
to FinCEN for civil enforcement.
    \409\31 U.S.C. sec. 3711(g).
    \410\31 C.F.R. sec. 103.56(g). Memorandum of Agreement and 
Delegation of Authority for Enforcement of FBAR Requirements (April 2, 
2003); News Release, Internal Revenue Service, IR-2003-48 (April 10, 
2003). Secretary of the Treasury, ``A Report to Congress in Accordance 
with sec. 361(b) of the Uniting and Strengthening America by Providing 
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 
2001 (USA Patriot Act)'' (April 24, 2003).
    \411\A penalty may be assessed before the end of the six-year 
period beginning on the date of the transaction with respect to which 
the penalty is assessed. 31 U.S.C. sec. 5321(b)(1). A civil action for 
collection may be commenced within two years of the later of the date 
of assessment and the date a judgment becomes final in any related 
criminal action. 31 U.S.C. sec. 5321(b)(2).
---------------------------------------------------------------------------
FBAR and awards to whistleblowers
      Recent cases have considered FBAR penalties in connection 
with IRS whistleblower awards.\412\ One case analyzed the 
provision dealing with ``additional amounts in dispute'' and 
linked that concept to amounts assessed and collected under the 
Code which FBAR is not.\413\ The issue was whether FBAR 
penalties constituted ``additional amounts'' for purposes of 
determining whether ``additional amounts in dispute exceed 
$2,000,000.'' The case was disposed on summary judgment on the 
grounds that FBAR penalties are not assessed, collected or paid 
in the same manner as taxes. As such, they are not additional 
amounts in dispute and therefore the threshold was not 
exceeded. Notably, the court suggested that the petitioner 
present its policy arguments to Congress based on the fact that 
the connection between FBAR and tax enforcement justified the 
Secretary to redelegate FBAR administrative authority to the 
IRS.\414\
---------------------------------------------------------------------------
    \412\Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6 (March 
14, 2016); and Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4 
(August 3, 2016).
    \413\Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6 (March 
14, 2016).
    \414\Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6 at 26-
27.
---------------------------------------------------------------------------
      Another case dealt with the provision ``collected 
proceeds'' and held that the term is not limited to amounts 
assessed and collected under Title 26.\415\ The issue in the 
case was whether payments of a criminal fine and civil 
forfeitures constitute collected proceeds.
---------------------------------------------------------------------------
    \415\Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4 
(August 3, 2016).
---------------------------------------------------------------------------
      The criminal fine was imposed under Title 18 as a result 
of guilty plea to conspiring to defraud the IRS, file false 
Federal income tax returns, and evade Federal income taxes. The 
money was forfeited pursuant to Title 18. The IRS argued that 
criminal fines and forfeitures are not collected proceeds 
because only amounts assessed and collected under Title 26 can 
be used to pay a whistleblower award. The IRS also argued that 
a criminal fine collected by the Government cannot be 
considered collected proceeds because (1) pursuant to 42 U.S.C. 
sec. 10601 all criminal fines collected from persons convicted 
of offenses against the United States are to be deposited in 
the Crime Victims Fund; (2) criminal fines are paid by the 
taxpayer directly to the imposing court, which in turn deposits 
them into the Crime Victims Fund; and (3) at no time are 
criminal fines available to the Secretary. The court said that 
the Code did not refer to, or require, the availability of 
funds to be used in making an award.\416\
---------------------------------------------------------------------------
    \416\Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4 at 28-
29.
---------------------------------------------------------------------------
      Petitioners said the payment resulted from action taken 
by Secretary and relates to acts committed by taxpayer in 
violation of Title 26 provisions. The court agreed and held 
that collected proceeds are not limited to amounts assessed and 
collected under Title 26. In reaching its holding it referenced 
Whistleblower 22716-13W v. Commissioner, discussed above and 
noted there is no inconsistency because the issue there was 
about whether the threshold of $2,000,000 was exceeded. It is 
not clear whether FBAR penalties would be included under their 
holding because in the case, the taxpayer did violate Title 26 
(even if the penalties were imposed under Title 18).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the provision, collected proceeds eligible for 
awards under the Code are defined to include: (1) penalties, 
interest, additions to tax, and additional amounts and (2) any 
proceeds under enforcement programs that the Treasury has 
delegated to the IRS the authority to administer, enforce, or 
investigate, including criminal fines and civil forfeitures, 
and violations of reporting requirements. This definition is 
also used to determine eligibility for the enhanced reward 
program under which proceeds and additional amounts in dispute 
exceed $2,000,000.
      The collected proceeds amounts are determined without 
regard to whether such proceeds are available to the Secretary.
      Effective date.--The provision is effective for 
information provided before, on, or after date of enactment 
with respect to which a final determination has not been made 
before such date.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
8. Exclusion from gross income of certain amounts received by wrongly 
        incarcerated individuals (sec. 11027 of the Senate amendment 
        and sec. 139F of the Code)

                              PRESENT LAW

      Under a provision added in the PATH Act,\417\ with 
respect to any wrongfully incarcerated individual, gross income 
does not include any civil damages, restitution, or other 
monetary award (including compensatory or statutory damages and 
restitution imposed in a criminal matter) relating to the 
incarceration of such individual for the covered offense for 
which such individual was convicted.\418\
---------------------------------------------------------------------------
    \417\Pub. L. No. 114-113 (2015), Division Q (Protecting Americans 
from Tax Hikes Act of 2015), sec. 304.
    \418\Sec. 139F.
---------------------------------------------------------------------------
      A wrongfully incarcerated individual means an individual:
            (1)  who was convicted of a covered offense;
            (2)  who served all or part of a sentence of 
        imprisonment relating to that covered offense; and
            (3)  (i) was pardoned, granted clemency, or granted 
        amnesty for such offense because the individual was 
        innocent, or
            (ii)  for whom the judgment of conviction for the 
        offense was reversed or vacated, and whom the 
        indictment, information, or other accusatory instrument 
        for that covered offense was dismissed or who was found 
        not guilty at a new trial after the judgment of 
        conviction for that covered offense was reversed or 
        vacated.
      For these purposes, a covered offense is any criminal 
offense under Federal or State law, and includes any criminal 
offense arising from the same course of conduct as that 
criminal offense.
      The Code contains a special rule allowing individuals to 
make a claim for credit or refund of any overpayment of tax 
resulting from the exclusion, even if such claim would be 
disallowed under the Code or by operation of any law or rule of 
law (including res judicata), if the claim for credit or refund 
is filed before the close of the one-year period beginning on 
the date of enactment of the PATH Act (December 18, 2015).\419\
---------------------------------------------------------------------------
    \419\Sec. 139F.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment would extend the waiver on the 
statute of limitations with respect to filing a claim for a 
credit or refund of an overpayment of tax resulting from the 
exclusion described above for an additional year. Thus, under 
the provision, such claim for credit or refund must be filed 
before December 18, 2017.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                          BUSINESS TAX REFORM

                              A. Tax Rates

1. Reduction in corporate tax rate (sec. 3001 of the House bill, secs. 
        13001 and 13002 of the Senate amendment, and secs. 11 and 243 
        of the Code)

                              PRESENT LAW

In general
      Corporate taxable income is subject to tax under a four-
step graduated rate structure.\420\ The top corporate tax rate 
is 35 percent on taxable income in excess of $10 million. The 
corporate taxable income brackets and tax rates are as set 
forth in the table below.
---------------------------------------------------------------------------
    \420\Sec. 11(a) and (b)(1).

 
------------------------------------------------------------------------
                Taxable Income                     Tax rate (percent)
------------------------------------------------------------------------
Not over $50,000..............................                       15
Over $50,000 but not over $75,000.............                       25
Over $75,000 but not over $10,000,000.........                       34
Over $10,000,000..............................                       35
------------------------------------------------------------------------

      An additional five-percent tax is imposed on a 
corporation's taxable income in excess of $100,000. The maximum 
additional tax is $11,750. Also, a second additional three-
percent tax is imposed on a corporation's taxable income in 
excess of $15 million. The maximum second additional tax is 
$100,000.
      Certain personal service corporations pay tax on their 
entire taxable income at the rate of 35 percent.\421\
---------------------------------------------------------------------------
    \421\Sec. 11(b)(2).
---------------------------------------------------------------------------
      Present law provides that, if the maximum corporate tax 
rate exceeds 35 percent, the maximum rate on a corporation's 
net capital gain will be 35 percent.\422\
---------------------------------------------------------------------------
    \422\Sec. 1201(a).
---------------------------------------------------------------------------
Dividends received deduction
      Corporations are allowed a deduction with respect to 
dividends received from other taxable domestic 
corporations.\423\ The amount of the deduction is generally 
equal to 70 percent of the dividend received.
---------------------------------------------------------------------------
    \423\Sec. 243(a). Such dividends are taxed at a maximum rate of 
10.5 percent (30 percent of the top corporate tax rate of 35 percent).
---------------------------------------------------------------------------
      In the case of any dividend received from a 20-percent 
owned corporation, the amount of the deduction is equal to 80 
percent of the dividend received.\424\ The term ``20-percent 
owned corporation'' means any corporation if 20 percent or more 
of the stock of such corporation (by vote and value) is owned 
by the taxpayer. For this purpose, certain preferred stock is 
not taken into account.
---------------------------------------------------------------------------
    \424\Sec. 243(c). Such dividends are taxed at a maximum rate of 7 
percent (20 percent of the top corporate tax rate of 35 percent).
---------------------------------------------------------------------------
      In the case of a dividend received from a corporation 
that is a member of the same affiliated group, a corporation is 
generally allowed a deduction equal to 100 percent of the 
dividend received.\425\
---------------------------------------------------------------------------
    \425\Sec. 243(a)(3) and (b)(1). For this purpose, the term 
``affiliated group'' generally has the meaning given such term by 
section 1504(a). Sec. 243(b)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision eliminates the graduated corporate rate 
structure and instead taxes corporate taxable income at 20 
percent.
      Personal service corporations are taxed at 25 percent.
      The provision repeals the maximum corporate tax rate on 
net capital gain as obsolete.
      The provision reduces the 70 percent dividends received 
deduction to 50 percent and the 80 percent dividends received 
deduction to 65 percent.\426\
---------------------------------------------------------------------------
    \426\Such dividends would be taxed at a maximum rate of 10 percent 
(50 percent of the top corporate tax rate of 20 percent) and 7 percent 
(35 percent of the top corporate tax rate of 20 percent), respectively.
---------------------------------------------------------------------------
      For taxpayers subject to the normalization method of 
accounting (e.g., regulated public utilities), the provision 
provides for the normalization of excess deferred tax reserves 
resulting from the reduction of corporate income tax rates 
(with respect to prior depreciation or recovery allowances 
taken on assets placed in service before the date of 
enactment).
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill, but does not 
provide a special rate for personal service corporations.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2018.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
but provides for a 21-percent corporate rate effective for 
taxable years beginning after December 31, 2017.
      In addition, for taxpayers subject to the normalization 
method of accounting (e.g., regulated public utilities), the 
conference agreement clarifies the normalization of excess tax 
reserves resulting from the reduction of corporate income tax 
rates (with respect to prior depreciation or recovery 
allowances taken on assets placed in service before the 
corporate rate reduction takes effect).
      The excess tax reserve is the reserve for deferred taxes 
as of the day before the corporate rate reduction takes effect 
over what the reserve for deferred taxes would be if the 
corporate rate reduction had been in effect for all prior 
periods. If an excess tax reserve is reduced more rapidly or to 
a greater extent than such reserve would be reduced under the 
average rate assumption method, the taxpayer will not be 
treated as using a normalization method with respect to the 
corporate rate reduction. If the taxpayer does not use a 
normalization method of accounting for the corporate rate 
reduction, the taxpayer's tax for the taxable year shall be 
increased by the amount by which it reduces its excess tax 
reserve more rapidly than permitted under a normalization 
method of accounting and the taxpayer will not be treated as 
using a normalization method of accounting for purposes of 
section 168(f)(2) and (i)(9)(C).\427\
---------------------------------------------------------------------------
    \427\Section 168(f)(2) and (i)(9)(C) provide that if a taxpayer is 
required to use a normalization method of accounting with respect to 
public utility property and does not do so, such taxpayer must compute 
its depreciation allowances for Federal income tax purposes using the 
depreciation method, useful life determination, averaging convention, 
and salvage value limitation used for purposes of setting rates and 
reflecting operating results in its regulated books of account.
---------------------------------------------------------------------------
      The average rate assumption method\428\ reduces the 
excess tax reserve over the remaining regulatory lives of the 
property that gave rise to the reserve for deferred taxes 
during the years in which the deferred tax reserve related to 
such property is reversing. Under this method, the excess tax 
reserve is reduced as the timing differences (i.e., differences 
between tax depreciation and regulatory depreciation with 
respect to the property) reverse over the remaining life of the 
asset. The reversal of timing differences generally occurs when 
the amount of the tax depreciation taken with respect to an 
asset is less than the amount of the regulatory depreciation 
taken with respect to the asset. To ensure that the deferred 
tax reserve, including the excess tax reserve, is reduced to 
zero at the end of the regulatory life of the asset that 
generated the reserve, the amount of the timing difference 
which reverses during a taxable year is multiplied by the ratio 
of (1) the aggregate deferred taxes as of the beginning of the 
period in question to (2) the aggregate timing differences for 
the property as of the beginning of the period in question.
---------------------------------------------------------------------------
    \428\See section 2.04 of Rev. Proc. 88-12, 1988-1 C.B. 637.
---------------------------------------------------------------------------
      The following example illustrates the application of the 
average rate assumption method. A calendar year regulated 
utility placed property costing $100 million in service in 
2016. For regulatory (book) purposes, the property is 
depreciated over 10 years on a straight line basis with a full 
year's allowance in the first year. For tax purposes, the 
property is depreciated over 5 years using the 200 percent 
declining balance method and a half-year placed in service 
convention.\429\
---------------------------------------------------------------------------
    \429\The 5-year tax and 10-year book lives are used for 
illustration purposes only. In general, public utility property may be 
depreciated over various periods ranging from 5 to 20 years under 
MACRS. For regulatory purposes, public utility property may, in certain 
cases, have a useful life of 30 years or more.

                                                 NORMALIZATION CALCULATION FOR CORPORATE RATE REDUCTION
                                                              (Millions of dollars--Years)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       2016     2017     2018     2019     2020      2021        2022        2023        2024        2025        Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Tax expense........................       20       32     19.2    11.52    11.52        5.76           0           0           0           0         100
Book depreciation..................       10       10       10       10       10          10          10          10          10          10         100
Timing difference..................       10       22      9.2     1.52     1.52      (4.24)        (10)        (10)        (10)        (10)           0
Tax rate...........................      35%      35%      21%      21%      21%       31.1%       31.1%       31.1%       31.1%       31.1%
Annual adjustment to reserve.......      3.5      7.7      1.9      0.3      0.3       (1.3)       (3.1)       (3.1)       (3.1)       (3.1)           0
Cumulative deferred tax reserve....      3.5     11.2     13.1     13.5     13.8        12.5         9.3         6.2         3.1       (0.0)           0
Annual adjustment at 21%...........                                                    (0.9)       (2.1)       (2.1)       (2.1)       (2.1)       (9.3)
Annual adjustment at average rate..                                                    (1.3)       (3.1)       (3.1)       (3.1)       (3.1)      (13.8)
Excess tax reserve.................                                                      0.4         1.0         1.0         1.0         1.0         4.5
--------------------------------------------------------------------------------------------------------------------------------------------------------

      The excess tax reserve as of December 31, 2017, the day 
before the corporate rate reduction takes effect, is $4.5 
million.\430\ The taxpayer will begin taking the excess tax 
reserve into account in the 2021 taxable year, which is the 
first year in which the tax depreciation taken with respect to 
the property is less than the depreciation reflected in the 
regulated books of account. The annual adjustment to the 
deferred tax reserve for the 2021 through 2025 taxable years is 
multiplied by 31.1 percent which is the ratio of the aggregate 
deferred taxes as of the beginning of 2021 ($13.8 million) to 
the aggregate timing differences for the property as of the 
beginning of 2021 ($44.2 million).
---------------------------------------------------------------------------
    \430\The excess tax reserve of $4.5 million is equal to the 
cumulative deferred tax reserve as of December 31, 2017 ($11.2 million) 
minus the cumulative timing difference as of December 31, 2017 ($32 
million) multiplied by 21 percent.
---------------------------------------------------------------------------
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            B. Cost Recovery

1. Increased expensing (sec. 3101 of the House bill, secs. 13201 and 
        13311 of the Senate amendment, and sec. 168(k) of the Code)

                              PRESENT LAW

      A taxpayer generally must capitalize the cost of property 
used in a trade or business or held for the production of 
income and recover such cost over time through annual 
deductions for depreciation or amortization.\431\
---------------------------------------------------------------------------
    \431\See secs. 263(a) and 167. However, where property is not used 
exclusively in a taxpayer's business, the amount eligible for a 
deduction must be reduced by the amount related to personal use. See, 
e.g., section 280A.
---------------------------------------------------------------------------
Tangible property
      Tangible property generally is depreciated under the 
modified accelerated cost recovery system (``MACRS''), which 
determines depreciation for different types of property based 
on an assigned applicable depreciation method, recovery 
period,\432\ and convention.\433\
---------------------------------------------------------------------------
    \432\The applicable recovery period for an asset is determined in 
part by statute and in part by historic Treasury guidance. Exercising 
authority granted by Congress, the Secretary issued Rev. Proc. 87-56, 
1987-2 C.B. 674, laying out the framework of recovery periods for 
enumerated classes of assets. The Secretary clarified and modified the 
list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November 
1988, Congress revoked the Secretary's authority to modify the class 
lives of depreciable property. Rev. Proc. 87-56, as modified, remains 
in effect except to the extent that the Congress has, since 1988, 
statutorily modified the recovery period for certain depreciable 
assets, effectively superseding any administrative guidance with regard 
to such property.
    \433\Sec. 168.
---------------------------------------------------------------------------
            Bonus depreciation
      An additional first-year depreciation deduction is 
allowed equal to 50 percent of the adjusted basis of qualified 
property acquired and placed in service before January 1, 2020 
(January 1, 2021, for longer production period property\434\ 
and certain aircraft\435\).\436\ The 50-percent allowance is 
phased down for property placed in service after December 31, 
2017 (after December 31, 2018 for longer production period 
property and certain aircraft). The bonus depreciation 
percentage rates are as follows.
---------------------------------------------------------------------------
    \434\As defined in section 168(k)(2)(B).
    \435\As defined in section 168(k)(2)(C).
    \436\Sec. 168(k). The additional first-year depreciation deduction 
is generally subject to the rules regarding whether a cost must be 
capitalized under section 263A.

------------------------------------------------------------------------
                                       Bonus Depreciation Percentage
                                 ---------------------------------------
                                                       Longer Production
     Placed in Service Year       Qualified Property   Period  Property
                                       in General        and  Certain
                                                           Aircraft
------------------------------------------------------------------------
2017............................  50 percent........  50 percent
2018............................  40 percent........  50 percent\437\
2019............................  30 percent........  40 percent
2020............................  None..............  30 percent\438\
------------------------------------------------------------------------

      The additional first-year depreciation deduction is 
allowed for both the regular tax and the alternative minimum 
tax (``AMT''),\439\ but is not allowed in computing earnings 
and profits.\440\ The basis of the property and the 
depreciation allowances in the year of purchase and later years 
are appropriately adjusted to reflect the additional first-year 
depreciation deduction.\441\ The amount of the additional 
first-year depreciation deduction is not affected by a short 
taxable year.\442\ The taxpayer may elect out of the additional 
first-year depreciation for any class of property for any 
taxable year.\443\
---------------------------------------------------------------------------
    \437\It is intended that for longer production period property 
placed in service in 2018, 50 percent applies to the entire adjusted 
basis. Similarly, for longer production period property placed in 
service in 2019, 40 percent applies to the entire adjusted basis. A 
technical correction may be necessary with respect to longer production 
period property placed in service in 2018 and 2019 so that the statute 
reflects this intent.
    \438\In the case of longer production period property described in 
section 168(k)(2)(B) and placed in service in 2020, 30 percent applies 
to the adjusted basis attributable to manufacture, construction, or 
production before January 1, 2020, and the remaining adjusted basis 
does not qualify for bonus depreciation. Thirty percent applies to the 
entire adjusted basis of certain aircraft described in section 
168(k)(2)(C) and placed in service in 2020.
    \439\Sec. 168(k)(2)(G). See also Treas. Reg. sec. 1.168(k)-1(d).
    \440\Sec. 312(k)(3) and Treas. Reg. sec. 1.168(k)-1(f)(7).
    \441\Sec. 168(k)(1)(B).
    \442\Ibid.
    \443\Sec. 168(k)(7). For the definition of a class of property, see 
Treas. Reg. sec. 1.168(k)-1(e)(2).
---------------------------------------------------------------------------
      The interaction of the additional first-year depreciation 
allowance with the otherwise applicable depreciation allowance 
may be illustrated as follows. Assume that in 2017 a taxpayer 
purchases new depreciable property and places it in 
service.\444\ The property's cost is $10,000, and it is five-
year property subject to the 200 percent declining balance 
method and half-year convention. The amount of additional 
first-year depreciation allowed is $5,000. The remaining $5,000 
of the cost of the property is depreciable under the rules 
applicable to five-year property. Thus, $1,000 also is allowed 
as a depreciation deduction in 2017.\445\ The total 
depreciation deduction with respect to the property for 2017 is 
$6,000. The remaining $4,000 adjusted basis of the property 
generally is recovered through otherwise applicable 
depreciation rules.
---------------------------------------------------------------------------
    \444\Assume that the cost of the property is not eligible for 
expensing under section 179 or Treas. Reg. sec. 1.263(a)-1(f).
    \445\$1,000 results from the application of the half-year 
convention and the 200 percent declining balance method to the 
remaining $5,000.
---------------------------------------------------------------------------
Qualified property
      Property qualifying for the additional first-year 
depreciation deduction must meet all of the following 
requirements.\446\ First, the property must be: (1) property to 
which MACRS applies with an applicable recovery period of 20 
years or less; (2) water utility property;\447\ (3) computer 
software other than computer software covered by section 197; 
or (4) qualified improvement property.\448\ Second, the 
original use\449\ of the property must commence with the 
taxpayer.\450\ Third, the taxpayer must acquire the property 
within the applicable time period (as described below). 
Finally, the property must be placed in service before January 
1, 2020. As noted above, an extension of the placed-in-service 
date of one year (i.e., before January 1, 2021) is provided for 
certain property with a recovery period of 10 years or longer, 
certain transportation property, and certain aircraft.\451\
---------------------------------------------------------------------------
    \446\Requirements relating to actions taken before 2008 are not 
described herein since they have little (if any) remaining effect.
    \447\As defined in section 168(e)(5).
    \448\The additional first-year depreciation deduction is not 
available for any property that is required to be depreciated under the 
alternative depreciation system of MACRS. Sec. 168(k)(2)(D)(i).
    \449\The term ``original use'' means the first use to which the 
property is put, whether or not such use corresponds to the use of such 
property by the taxpayer. If in the normal course of its business a 
taxpayer sells fractional interests in property to unrelated third 
parties, then the original use of such property begins with the first 
user of each fractional interest (i.e., each fractional owner is 
considered the original user of its proportionate share of the 
property). Treas. Reg. sec. 1.168(k)-1(b)(3).
    \450\A special rule applies in the case of certain leased property. 
In the case of any property that is originally placed in service by a 
person and that is sold to the taxpayer and leased back to such person 
by the taxpayer within three months after the date that the property 
was placed in service, the property would be treated as originally 
placed in service by the taxpayer not earlier than the date that the 
property is used under the leaseback. If property is originally placed 
in service by a lessor, such property is sold within three months after 
the date that the property was placed in service, and the user of such 
property does not change, then the property is treated as originally 
placed in service by the taxpayer not earlier than the date of such 
sale. Sec. 168(k)(2)(E)(ii) and (iii).
    \451\Property qualifying for the extended placed-in-service date 
must have an estimated production period exceeding one year and a cost 
exceeding $1 million. Transportation property generally is defined as 
tangible personal property used in the trade or business of 
transporting persons or property. Certain aircraft which is not 
transportation property, other than for agricultural or firefighting 
uses, also qualifies for the extended placed-in-service date, if at the 
time of the contract for purchase, the purchaser made a nonrefundable 
deposit of the lesser of 10 percent of the cost or $100,000, and which 
has an estimated production period exceeding four months and a cost 
exceeding $200,000.
---------------------------------------------------------------------------
      To qualify, property must be acquired (1) before January 
1, 2020, or (2) pursuant to a binding written contract which 
was entered into before January 1, 2020. With respect to 
property that is manufactured, constructed, or produced by the 
taxpayer for use by the taxpayer, the taxpayer must begin the 
manufacture, construction, or production of the property before 
January 1, 2020.\452\ Property that is manufactured, 
constructed, or produced for the taxpayer by another person 
under a contract that is entered into prior to the manufacture, 
construction, or production of the property is considered to be 
manufactured, constructed, or produced by the taxpayer.\453\ 
For property eligible for the extended placed-in-service date, 
a special rule limits the amount of costs eligible for the 
additional first-year depreciation. With respect to such 
property, only the portion of the basis that is properly 
attributable to the costs incurred before January 1, 2020 
(``progress expenditures'') is eligible for the additional 
first-year depreciation deduction.\454\
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    \452\Sec. 168(k)(2)(E)(i).
    \453\Treas. Reg. sec. 1.168(k)-1(b)(4)(iii).
    \454\Sec. 168(k)(2)(B)(ii). For purposes of determining the amount 
of eligible progress expenditures, rules similar to section 46(d)(3) as 
in effect prior to the Tax Reform Act of 1986 apply.
---------------------------------------------------------------------------
Qualified improvement property
      Qualified improvement property is any improvement to an 
interior portion of a building that is nonresidential real 
property if such improvement is placed in service after the 
date such building was first placed in service.\455\ Qualified 
improvement property does not include any improvement for which 
the expenditure is attributable to the enlargement of the 
building, any elevator or escalator, or the internal structural 
framework of the building.
---------------------------------------------------------------------------
    \455\Sec. 168(k)(3).
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            Election to accelerate AMT credits in lieu of bonus 
                    depreciation
      A corporation otherwise eligible for additional first-
year depreciation may elect to claim additional AMT credits in 
lieu of claiming additional depreciation with respect to 
qualified property.\456\ In the case of a corporation making 
this election, the straight line method is used for the regular 
tax and the AMT with respect to qualified property.\457\
---------------------------------------------------------------------------
    \456\Sec. 168(k)(4).
    \457\Sec. 168(k)(4)(A)(ii).
---------------------------------------------------------------------------
      A corporation making an election increases the tax 
liability limitation under section 53(c) on the use of minimum 
tax credits by the bonus depreciation amount. The aggregate 
increase in credits allowable by reason of the increased 
limitation is treated as refundable.
      The bonus depreciation amount generally is equal to 20 
percent of bonus depreciation for qualified property that could 
be claimed as a deduction absent an election under this 
provision.\458\ As originally enacted, the bonus depreciation 
amount for all taxable years was limited to the lesser of (1) 
$30 million or (2) six percent of the minimum tax credits 
allocable to the adjusted net minimum tax imposed for taxable 
years beginning before January 1, 2006. However, extensions of 
this provision have provided that this limitation applies 
separately to property subject to each extension.
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    \458\For this purpose, bonus depreciation is the difference between 
(i) the aggregate amount of depreciation determined if section 
168(k)(1) applied to all qualified property placed in service during 
the taxable year and (ii) the amount of depreciation that would be so 
determined if section 168(k)(1) did not so apply. This determination is 
made using the most accelerated depreciation method and the shortest 
life otherwise allowable for each property.
---------------------------------------------------------------------------
      For taxable years ending after December 31, 2015, the 
bonus depreciation amount for a taxable year (as defined under 
present law with respect to all qualified property) is limited 
to the lesser of (1) 50 percent of the minimum tax credit for 
the first taxable year ending after December 31, 2015 
(determined before the application of any tax liability 
limitation) or (2) the minimum tax credit for the taxable year 
allocable to the adjusted net minimum tax imposed for taxable 
years ending before January 1, 2016 (determined before the 
application of any tax liability limitation and determined on a 
first-in, first-out basis).
      All corporations treated as a single employer under 
section 52(a) are treated as one taxpayer for purposes of the 
limitation, as well as for electing the application of this 
provision.\459\
---------------------------------------------------------------------------
    \459\Sec. 168(k)(4)(B)(iii).
---------------------------------------------------------------------------
      In the case of a corporation making an election which is 
a partner in a partnership, for purposes of determining the 
electing partner's distributive share of partnership items, 
bonus depreciation does not apply to any qualified property and 
the straight line method is used with respect to that 
property.\460\
---------------------------------------------------------------------------
    \460\Sec. 168(k)(4)(D)(ii).
---------------------------------------------------------------------------
      In the case of a partnership having a single corporate 
partner owning (directly or indirectly) more than 50 percent of 
the capital and profits interests in the partnership, each 
partner takes into account its distributive share of 
partnership depreciation in determining its bonus depreciation 
amount.\461\
---------------------------------------------------------------------------
    \461\Sec. 168(k)(4)(D)(iii).
---------------------------------------------------------------------------
            Special rules
Passenger automobiles
      The limitation under section 280F on the amount of 
depreciation deductions allowed with respect to certain 
passenger automobiles is increased in the first year by $8,000 
for automobiles that qualify (and for which the taxpayer does 
not elect out of the additional first-year deduction).\462\ The 
$8,000 amount is phased down from $8,000 by $1,600 per calendar 
year beginning in 2018. Thus, the section 280F increase amount 
for property placed in service during 2018 is $6,400, and 
during 2019 is $4,800. While the underlying section 280F 
limitation is indexed for inflation,\463\ the section 280F 
increase amount is not indexed for inflation. The increase does 
not apply to a taxpayer who elects to accelerate AMT credits in 
lieu of bonus depreciation for a taxable year.
---------------------------------------------------------------------------
    \462\Sec. 168(k)(2)(F).
    \463\Sec. 280F(d)(7).
---------------------------------------------------------------------------
Certain plants bearing fruits and nuts
      A special election is provided for certain plants bearing 
fruits and nuts.\464\ Under the election, the applicable 
percentage of the adjusted basis of a specified plant which is 
planted or grafted after December 31, 2015, and before January 
1, 2020, is deductible for regular tax and AMT purposes in the 
year planted or grafted by the taxpayer, and the adjusted basis 
is reduced by the amount of the deduction.\465\ The percentage 
is 50 percent for 2017, 40 percent for 2018, and 30 percent for 
2019. A specified plant is any tree or vine that bears fruits 
or nuts, and any other plant that will have more than one yield 
of fruits or nuts and generally has a preproductive period of 
more than two years from planting or grafting to the time it 
begins bearing fruits or nuts.\466\ The election is revocable 
only with the consent of the Secretary, and if the election is 
made with respect to any specified plant, such plant is not 
treated as qualified property eligible for bonus depreciation 
in the subsequent taxable year in which it is placed in 
service.
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    \464\See sec. 168(k)(5).
    \465\Any amount deducted under this election is not subject to 
capitalization under section 263A.
    \466\A specified plant does not include any property that is 
planted or grafted outside the United States.
---------------------------------------------------------------------------
Long-term contracts
      In general, in the case of a long-term contract, the 
taxable income from the contract is determined under the 
percentage-of-completion method.\467\ Solely for purposes of 
determining the percentage of completion under section 
460(b)(1)(A), the cost of qualified property with a MACRS 
recovery period of seven years or less is taken into account as 
a cost allocated to the contract as if bonus depreciation had 
not been enacted for property placed in service before January 
1, 2020 (January 1, 2021, in the case of longer production 
period property).\468\
---------------------------------------------------------------------------
    \467\Sec. 460.
    \468\Sec. 460(c)(6). Other dates involving prior years are not 
described herein.
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Intangible property
      MACRS does not apply to certain property, including any 
motion picture film, video tape, or sound recording, or to any 
other property if the taxpayer elects to exclude such property 
from MACRS and the taxpayer properly applies a unit-of-
production method or other method of depreciation not expressed 
in a term of years.\469\ Section 197 (amortization of goodwill 
and certain other intangibles) does not apply to certain 
intangible property, including certain property produced by the 
taxpayer or any interest in a film, sound recording, video 
tape, book or similar property not acquired in a transaction 
(or a series of related transactions) involving the acquisition 
of assets constituting a trade or business or substantial 
portion thereof.\470\ Thus, the recovery of the cost of a film, 
video tape, or similar property that is produced by the 
taxpayer or is acquired on a ``stand-alone'' basis by the 
taxpayer may not be determined under either the MACRS 
depreciation provisions or under the section 197 amortization 
provisions. The cost recovery of such property may be 
determined under section 167, which allows a depreciation 
deduction for the reasonable allowance for the exhaustion, wear 
and tear, or obsolescence of the property if it is used in a 
trade or business or held for the production of income. In 
addition, the costs of motion picture films, video tapes, sound 
recordings, copyrights, books, and patents are eligible to be 
recovered using the income forecast method of 
depreciation.\471\
---------------------------------------------------------------------------
    \469\Sec. 168(f)(1), (3) and (4).
    \470\Sec. 197(c)(2) and (e)(4)(A). If section 197 applies to the 
acquisition of intangible assets held in connection with a trade or 
business, any value properly attributable to a ``section 197 
intangible'' is amortizable on a straight-line basis over 15 years. 
Sec. 197(a) and (c).
    \471\Sec. 167(g)(6). Under the income forecast method, a property's 
depreciation deduction for a taxable year is determined by multiplying 
the adjusted basis of the property by a fraction, the numerator of 
which is the gross income generated by the property during the year, 
and the denominator of which is the total forecasted or estimated gross 
income expected to be generated prior to the close of the tenth taxable 
year after the year the property is placed in service. Any costs that 
are not recovered by the end of the tenth taxable year after the 
property is placed in service may be taken into account as depreciation 
in that year. Sec. 167(g)(1).
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            Expensing of certain qualified film, television and live 
                    theatrical productions
      Under section 181, a taxpayer may elect\472\ to deduct 
the cost of any qualifying film, television and live theatrical 
production, commencing prior to January 1, 2017, in the year 
the expenditure is incurred in lieu of capitalizing the cost 
and recovering it through depreciation allowances.\473\ A 
taxpayer may elect to deduct up to $15 million of the aggregate 
cost of the film or television production under this 
section.\474\ The threshold is increased to $20 million if a 
significant amount of the production expenditures are incurred 
in areas eligible for designation as a low-income community or 
eligible for designation by the Delta Regional Authority as a 
distressed county or isolated area of distress.\475\
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    \472\See Treas. Reg. sec. 1.181-2 for rules on making an election 
under this section.
    \473\For this purpose, a qualified film or television production is 
treated as commencing on the first date of principal photography. The 
date on which a qualified live theatrical production commences is the 
date of the first public performance of such production for a paying 
audience.
    \474\Sec. 181(a)(2)(A). See Treas. Reg. sec. 1.181-1 for rules on 
determining eligible production costs.
    \475\Sec. 181(a)(2)(B).
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      A qualified film, television or live theatrical 
production means any production of a motion picture (whether 
released theatrically or directly to video cassette or any 
other format), television program or live staged play if at 
least 75 percent of the total compensation expended on the 
production is for services performed in the United States by 
actors, directors, producers, and other relevant production 
personnel.\476\ The term ``compensation'' does not include 
participations and residuals (as defined in section 
167(g)(7)(B)).\477\
---------------------------------------------------------------------------
    \476\Sec. 181(d)(3)(A).
    \477\Sec. 181(d)(3)(B).
---------------------------------------------------------------------------
      Each episode of a television series is treated as a 
separate production, and only the first 44 episodes of a 
particular series qualify under the provision.\478\ Qualified 
productions do not include sexually explicit productions as 
referenced by section 2257 of title 18 of the U.S. Code.\479\
---------------------------------------------------------------------------
    \478\Sec. 181(d)(2)(B).
    \479\Sec. 181(d)(2)(C).
---------------------------------------------------------------------------
      A qualified live theatrical production is defined as a 
live staged production of a play (with or without music) which 
is derived from a written book or script and is produced or 
presented by a commercial entity in any venue which has an 
audience capacity of not more than 3,000, or a series of venues 
the majority of which have an audience capacity of not more 
than 3,000.\480\ In addition, qualified live theatrical 
productions include any live staged production which is 
produced or presented by a taxable entity no more than 10 weeks 
annually in any venue which has an audience capacity of not 
more than 6,500.\481\ In general, in the case of multiple live-
staged productions, each such live-staged production is treated 
as a separate production. Similar to the exclusion for sexually 
explicit productions from the definition of qualified film or 
television productions, qualified live theatrical productions 
do not include stage performances that would be excluded by 
section 2257(h)(1) of title 18 of the U.S. Code, if such 
provision were extended to live stage performances.\482\
---------------------------------------------------------------------------
    \480\Sec. 181(e)(2)(A).
    \481\Sec. 181(e)(2)(D).
    \482\Sec. 181(e)(2)(E).
---------------------------------------------------------------------------
      For purposes of recapture under section 1245, any 
deduction allowed under section 181 is treated as if it were a 
deduction allowable for amortization.\483\
---------------------------------------------------------------------------
    \483\Sec. 1245(a)(2)(C).
---------------------------------------------------------------------------

                               HOUSE BILL

Full expensing for certain business assets
      The provision extends and modifies the additional first-
year depreciation deduction through 2022 (through 2023 for 
longer production period property and certain aircraft). The 
50-percent allowance is increased to 100 percent for property 
acquired and placed in service after September 27, 2017, and 
before January 1, 2023 (January 1, 2024, for longer production 
period property and certain aircraft), as well as for specified 
plants planted or grafted after September 27, 2017, and before 
January 1, 2023.
            Special rules
      The $8,000 increase amount in the limitation on the 
depreciation deductions allowed with respect to certain 
passenger automobiles is increased to $16,000 for passenger 
automobiles acquired and placed in service after September 27, 
2017, and before January 1, 2023.
      The provision extends the special rule under the 
percentage-of-completion method for the allocation of bonus 
depreciation to a long-term contract for property placed in 
service before January 1, 2023 (January 1, 2024, in the case of 
longer production period property).
Application to used property
      The provision removes the requirement that the original 
use of qualified property must commence with the taxpayer. 
Thus, the provision applies to purchases of used as well as new 
items. To prevent abuses, the additional first-year 
depreciation deduction applies only to property purchased in an 
arm's-length transaction. It does not apply to property 
received as a gift or from a decedent.\484\ In the case of 
trade-ins, like-kind exchanges, or involuntary conversions, it 
applies only to any money paid in addition to the traded-in 
property or in excess of the adjusted basis of the replaced 
property.\485\ It does not apply to property acquired in a 
nontaxable exchange such as a reorganization, to property 
acquired from a member of the taxpayer's family, including a 
spouse, ancestors, and lineal descendants, or from another 
related entity as defined in section 267, nor to property 
acquired from a person who controls, is controlled by, or is 
under common control with, the taxpayer.\486\ Thus it does not 
apply, for example, if one member of an affiliated group of 
corporations purchases property from another member, or if an 
individual who controls a corporation purchases property from 
that corporation.
---------------------------------------------------------------------------
    \484\By reference to section 179(d)(2)(C). See also Treas. Reg. 
sec. 1.179-4(c)(1)(iv).
    \485\By reference to section 179(d)(3). See also Treas. Reg. sec. 
1.179-4(d).
    \486\By reference to section 179(d)(2)(A) and (B). See also Treas. 
Reg. sec. 1.179-4(c).
---------------------------------------------------------------------------
Exception for certain businesses not subject to limitation on interest 
        expense
      The provision excludes from the definition of qualified 
property any property used in a real property trade or 
business, i.e., any real property development, redevelopment, 
construction, reconstruction, acquisition, conversion, rental, 
operation, management, leasing, or brokerage trade or 
business.\487\
---------------------------------------------------------------------------
    \487\As defined in section 3301 of the House bill (Interest), by 
cross reference to section 469(c)(7)(C). Note that a mortgage broker 
who is a broker of financial instruments is not in a real property 
trade or business for this purpose. See, e.g., CCA 201504010 (December 
17, 2014).
---------------------------------------------------------------------------
      The provision also excludes from the definition of 
qualified property any property used in the trade or business 
of certain regulated public utilities, i.e., the trade or 
business of the furnishing or sale of (1) electrical energy, 
water, or sewage disposal services, (2) gas or steam through a 
local distribution system, or (3) transportation of gas or 
steam by pipeline, if the rates for such furnishing or sale, as 
the case may be, have been established or approved by a State 
or political subdivision thereof, by any agency or 
instrumentality of the United States, or by a public service or 
public utility commission or other similar body of any State or 
political subdivision thereof.\488\
---------------------------------------------------------------------------
    \488\As defined in section 3301 of the House bill (Interest).
---------------------------------------------------------------------------
      In addition, the provision excludes from the definition 
of qualified property any property used in a trade or business 
that has had floor plan financing indebtedness,\489\ unless the 
taxpayer with such trade or business is not a tax shelter 
prohibited from using the cash method and is exempt from the 
interest limitation rules in section 3301 of the bill by 
meeting the $25 million gross receipts test of section 448(c).
---------------------------------------------------------------------------
    \489\As defined in section 3301 of the House bill (Interest).
---------------------------------------------------------------------------
Election to accelerate AMT credits in lieu of bonus depreciation
      As a conforming amendment to the repeal of AMT,\490\ the 
provision repeals the election to accelerate AMT credits in 
lieu of bonus depreciation.
---------------------------------------------------------------------------
    \490\See section 2001 of the House bill (Repeal of alternative 
minimum tax).
---------------------------------------------------------------------------
Transition rule
      The present-law phase-down of bonus depreciation is 
maintained for property acquired before September 28, 2017, and 
placed in service after September 27, 2017. Under the 
provision, in the case of property acquired and adjusted basis 
incurred before September 28, 2017, the bonus depreciation 
rates are as follows.

  PHASE-DOWN FOR PORTION OF BASIS OF QUALIFIED PROPERTY ACQUIRED BEFORE
                           SEPTEMBER 28, 2017
------------------------------------------------------------------------
                                       Bonus Depreciation Percentage
                                 ---------------------------------------
                                                       Longer Production
     Placed in Service Year       Qualified Property    Period Property
                                      in General          and Certain
                                                           Aircraft
------------------------------------------------------------------------
2017............................  50 percent........  50 percent
2018............................  40 percent........  50 percent
2019............................  30 percent........  40 percent
2020............................  None..............  30 percent
------------------------------------------------------------------------

      Similarly, the section 280F increase amount in the 
limitation on the depreciation deductions allowed with respect 
to certain passenger automobiles acquired before September 28, 
2017, and placed in service after September 27, 2017, is $8,000 
for 2017, $6,400 for 2018, and $4,800 for 2019.
      Effective date.--The provision generally applies to 
property acquired\491\ and placed in service after September 
27, 2017, and to specified plants planted or grafted after such 
date.
---------------------------------------------------------------------------
    \491\Property is not treated as acquired after the date on which a 
written binding contract is entered into for such acquisition.
---------------------------------------------------------------------------
      A transition rule provides that, for a taxpayer's first 
taxable year ending after September 27, 2017, the taxpayer may 
elect to apply section 168 without regard to the amendments 
made by this provision.
      In the case of any taxable year that includes any portion 
of the period beginning on September 28, 2017, and ending on 
December 31, 2017, the amount of any net operating loss for 
such taxable year which may be treated as a net operating loss 
carryback is determined without regard to the amendments made 
by this provision.\492\
---------------------------------------------------------------------------
    \492\See section 3302 of the House bill (Modification of net 
operating loss deduction).
---------------------------------------------------------------------------

                            SENATE AMENDMENT

In general
      The provision extends and modifies the additional first-
year depreciation deduction through 2026 (through 2027 for 
longer production period property and certain aircraft). The 
50-percent allowance is increased to 100 percent for property 
placed in service after September 27, 2017, and before January 
1, 2023 (January 1, 2024, for longer production period property 
and certain aircraft), as well as for specified plants planted 
or grafted after September 27, 2017, and before January 1, 
2023. Thus, the provision repeals the phase-down of the 50-
percent allowance for property placed in service after December 
31, 2017, and for specified plants planted or grafted after 
such date. The 100-percent allowance is phased down by 20 
percent per calendar year for property placed in service, and 
specified plants planted or grafted, in taxable years beginning 
after 2022 (after 2023 for longer production period property 
and certain aircraft). Under the provision, the bonus 
depreciation percentage rates are as follows.

 
------------------------------------------------------------------------
                                       Bonus Depreciation Percentage
                                 ---------------------------------------
                                                       Longer Production
   Placed in Service Year\493\    Qualified Property    Period Property
                                      in General          and Certain
                                                           Aircraft
------------------------------------------------------------------------
2023............................  80 percent........  100 percent
2024............................  60 percent........  80 percent
2025............................  40 percent........  60 percent
2026............................  20 percent........  40 percent
2027............................  None..............  20 percent\494\
------------------------------------------------------------------------

            Special rules
      The provision maintains the section 280F increase amount 
of $8,000 for passenger automobiles placed in service after 
December 31, 2017.
---------------------------------------------------------------------------
    \493\In the case of specified plants, this is the year of planting 
or grafting.
    \494\Twenty percent applies to the adjusted basis attributable to 
manufacture, construction, or production before January 1, 2027, and 
the remaining adjusted basis does not qualify for bonus depreciation. 
Twenty percent applies to the entire adjusted basis of certain aircraft 
described in section 168(k)(2)(C) and placed in service in 2027.
---------------------------------------------------------------------------
      The provision extends the special rule under the 
percentage-of-completion method for the allocation of bonus 
depreciation to a long-term contract for property placed in 
service before January 1, 2027 (January 1, 2028, in the case of 
longer production period property).
Application to qualified film, television and live theatrical 
        productions
      The provision expands the definition of qualified 
property eligible for the additional first-year depreciation 
allowance to include qualified film, television and live 
theatrical productions\495\ placed in service after September 
27, 2017, and before January 1, 2027, for which a deduction 
otherwise would have been allowable under section 181 without 
regard to the dollar limitation or termination of such section. 
For purposes of this provision, a production is considered 
placed in service at the time of initial release, broadcast, or 
live staged performance (i.e., at the time of the first 
commercial exhibition, broadcast, or live staged performance of 
a production to an audience).
---------------------------------------------------------------------------
    \495\As defined in section 181(d) and (e).
---------------------------------------------------------------------------
Exception for certain businesses not subject to limitation on interest 
        expense
      The provision excludes from the definition of qualified 
property any property which is primarily used in the trade or 
business of the furnishing\496\ or sale of (1) electrical 
energy, water, or sewage disposal services, (2) gas or steam 
through a local distribution system, or (3) transportation of 
gas or steam by pipeline, if the rates for such furnishing or 
sale, as the case may be, have been established or approved by 
a State or political subdivision thereof, by any agency or 
instrumentality of the United States, by a public service or 
public utility commission or other similar body of any State or 
political subdivision thereof, or by the governing or 
ratemaking body of an electric cooperative.\497\
---------------------------------------------------------------------------
    \496\The term ``furnishing'' includes generation, transmission, and 
distribution activities.
    \497\See sec. 13301 of the Senate amendment (Limitation on 
deduction for interest).
---------------------------------------------------------------------------
      In addition, the provision excludes from the definition 
of qualified property any property used in a trade or business 
that has had floor plan financing indebtedness,\498\ unless the 
taxpayer with such trade or business is not a tax shelter 
prohibited from using the cash method and is exempt from the 
interest limitation rules in section 13301 of the Senate 
amendment by meeting the small business gross receipts test of 
section 448(c).
---------------------------------------------------------------------------
    \498\As defined in section 13311 of the Senate amendment (Floor 
plan financing).
---------------------------------------------------------------------------
      Effective date.--The provision generally applies to 
property placed in service after September 27, 2017, in taxable 
years ending after such date, and to specified plants planted 
or grafted after such date.
      A transition rule provides that, for a taxpayer's first 
taxable year ending after September 27, 2017, the taxpayer may 
elect to apply a 50-percent allowance instead of the 100-
percent allowance.\499\
---------------------------------------------------------------------------
    \499\Such election shall be made at such time and in such form and 
manner as prescribed by the Secretary.
---------------------------------------------------------------------------

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment but 
also includes the House bill's removal of the requirement that 
the original use of qualified property must commence with the 
taxpayer (i.e., it allows the additional first-year 
depreciation deduction for new and used property).
      In addition, the conference agreement also follows the 
House bill's application of the present-law phase-down of bonus 
depreciation to property acquired before September 28, 2017, 
and placed in service after September 27, 2017, as well as the 
present-law phase-down of the section 280F increase amount in 
the limitation on the depreciation deductions allowed with 
respect to certain passenger automobiles acquired before 
September 28, 2017, and placed in service after September 27, 
2017. Under the conference agreement, the bonus depreciation 
rates are as follows.

 
------------------------------------------------------------------------
                                       Bonus Depreciation Percentage
                                 ---------------------------------------
                                                       Longer Production
   Placed in Service Year\500\    Qualified Property    Period Property
                                      in General/         and Certain
                                   Specified Plants        Aircraft
------------------------------------------------------------------------
  Portion of Basis of Qualified Property Acquired before Sept. 28, 2017
 
Sept. 28, 2017-Dec. 31, 2017....  50 percent........  50 percent
2018............................  40 percent........  50 percent
2019............................  30 percent........  40 percent
2020............................  None..............  30 percent\501\
2021 and thereafter.............  None..............  None
------------------------------------------------------------------------
  Portion of Basis of Qualified Property Acquired after Sept. 27, 2017
 
Sept. 28, 2017-Dec. 31, 2022....  100 percent.......  100 percent
2023............................  80 percent........  100 percent
2024............................  60 percent........  80 percent
2025............................  40 percent........  60 percent
2026............................  20 percent........  40 percent
2027............................  None..............  20 percent\502\
2028 and thereafter.............  None..............  None
------------------------------------------------------------------------

      As a conforming amendment to the repeal of corporate AMT, 
the conference agreement repeals the election to accelerate AMT 
credits in lieu of bonus depreciation.
---------------------------------------------------------------------------
    \500\In the case of specified plants, this is the year of planting 
or grafting.
    \501\Thirty percent applies to the adjusted basis attributable to 
manufacture, construction, or production before January 1, 2020, and 
the remaining adjusted basis does not qualify for bonus depreciation. 
Thirty percent applies to the entire adjusted basis of certain aircraft 
described in section 168(k)(2)(C) and placed in service in 2020.
    \502\Twenty percent applies to the adjusted basis attributable to 
manufacture, construction, or production before January 1, 2027, and 
the remaining adjusted basis does not qualify for bonus depreciation. 
Twenty percent applies to the entire adjusted basis of certain aircraft 
described in section 168(k)(2)(C) and placed in service in 2027.
---------------------------------------------------------------------------
      Effective date.--The provision generally applies to 
property acquired and placed in service after September 27, 
2017, and to specified plants planted or grafted after such 
date.
      A transition rule provides that, for a taxpayer's first 
taxable year ending after September 27, 2017, the taxpayer may 
elect to apply a 50-percent allowance instead of the 100-
percent allowance.
2. Modifications to depreciation limitations on luxury automobiles and 
        personal use property (sec. 13202 of the Senate amendment and 
        sec. 280F of the Code)

                              PRESENT LAW

      Section 280F(a) limits the annual cost recovery deduction 
with respect to certain passenger automobiles. This limitation 
is commonly referred to as the ``luxury automobile depreciation 
limitation.'' For passenger automobiles placed in service in 
2017, and for which the additional first-year depreciation 
deduction under section 168(k) is not claimed, the maximum 
amount of allowable depreciation is $3,160 for the year in 
which the vehicle is placed in service, $5,100 for the second 
year, $3,050 for the third year, and $1,875 for the fourth and 
later years in the recovery period.\503\ This limitation is 
indexed for inflation and applies to the aggregate deduction 
provided under present law for depreciation and section 179 
expensing. Hence, passenger automobiles subject to section 280F 
are eligible for section 179 expensing only to the extent of 
the applicable limits contained in section 280F. For passenger 
automobiles eligible for the additional first-year depreciation 
allowance in 2017, the first-year limitation is increased by an 
additional $8,000.\504\
---------------------------------------------------------------------------
    \503\Rev. Proc. 2017-29, Table 3, 2017-14 I.R.B. 1065.
    \504\Sec. 168(k)(2)(F). For proposed changes to section 168(k), see 
section II.B.1. of this document (Increased expensing).
---------------------------------------------------------------------------
      For purposes of the depreciation limitation, passenger 
automobiles are defined broadly to include any four-wheeled 
vehicles that are manufactured primarily for use on public 
streets, roads, and highways and which are rated at 6,000 
pounds unloaded gross vehicle weight or less.\505\ In the case 
of a truck or a van, the depreciation limitation applies to 
vehicles that are rated at 6,000 pounds gross vehicle weight or 
less. Sport utility vehicles are treated as a truck for the 
purpose of applying the section 280F limitation.
---------------------------------------------------------------------------
    \505\Sec. 280F(d)(5). Exceptions are provided for any ambulance, 
hearse, or combination ambulance-hearse used by the taxpayer directly 
in a trade or business, or any vehicle used by the taxpayer directly in 
the trade or business of transporting persons or property for 
compensation or hire.
---------------------------------------------------------------------------
      Basis not recovered in the recovery period of a passenger 
automobile is allowable as an expense in subsequent taxable 
years.\506\ The expensed amount is limited in each such 
subsequent taxable year to the amount of the limitation in the 
fourth year in the recovery period.
---------------------------------------------------------------------------
    \506\Sec. 280F(a)(1)(B).
---------------------------------------------------------------------------
Listed property
      In the case of certain listed property, special rules 
apply. Listed property generally is defined as (1) any 
passenger automobile; (2) any other property used as a means of 
transportation;\507\ (3) any property of a type generally used 
for purposes of entertainment, recreation, or amusement; (4) 
any computer or peripheral equipment;\508\ and (5) any other 
property of a type specified in Treasury regulations.\509\
---------------------------------------------------------------------------
    \507\Property substantially all of the use of which is in a trade 
or business of providing transportation to unrelated persons for hire 
is not considered other property used as a means of transportation. 
Sec. 280F(d)(4)(C).
    \508\Computer or peripheral equipment used exclusively at a regular 
business establishment and owned or leased by the person operating such 
establishment, however, is not listed property. Sec. 280F(d)(4)(B).
    \509\Sec. 280F(d)(4)(A).
---------------------------------------------------------------------------
      First, if for the taxable year in which the property is 
placed in service, the use of the property for trade or 
business purposes does not exceed 50 percent of the total use 
of the property, then the depreciation deduction with respect 
to such property is determined under the alternative 
depreciation system.\510\ The alternative depreciation system 
generally requires the use of the straight-line method and a 
recovery period equal to the class life of the property.\511\ 
Second, if an individual owns or leases listed property that is 
used by the individual in connection with the performance of 
services as an employee, no depreciation deduction, expensing 
allowance, or deduction for lease payments is available with 
respect to such use unless the use of the property is for the 
convenience of the employer and required as a condition of 
employment.\512\ Both limitations apply for purposes of section 
179 expensing.
---------------------------------------------------------------------------
    \510\Sec. 280F(b)(1). If for any taxable year after the year in 
which the property is placed in service the use of the property for 
trade or business purposes decreases to 50 percent or less of the total 
use of the property, then the amount of depreciation allowed in prior 
years in excess of the amount of depreciation that would have been 
allowed for such prior years under the alternative depreciation system 
is recaptured (i.e., included in gross income) for such taxable year.
    \511\Sec. 168(g).
    \512\Sec. 280F(d)(3).
---------------------------------------------------------------------------
      For listed property, no deduction is allowed unless the 
taxpayer adequately substantiates the expense and business 
usage of the property.\513\ A taxpayer must substantiate the 
elements of each expenditure or use of listed property, 
including (1) the amount (e.g., cost) of each separate 
expenditure and the amount of business or investment use, based 
on the appropriate measure (e.g., mileage for automobiles), and 
the total use of the property for the taxable period, (2) the 
date of the expenditure or use, and (3) the business purposes 
for the expenditure or use.\514\ The level of substantiation 
for business or investment use of listed property varies 
depending on the facts and circumstances. In general, the 
substantiation must contain sufficient information as to each 
element of every business or investment use.\515\
---------------------------------------------------------------------------
    \513\Sec. 274(d)(4).
    \514\Temp. Reg. sec. 1.274-5T(b)(6).
    \515\Temp. Reg. sec. 1.274-5T(c)(2)(ii)(C).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision increases the depreciation limitations 
under section 280F that apply to listed property. For passenger 
automobiles placed in service after December 31, 2017, and for 
which the additional first-year depreciation deduction under 
section 168(k) is not claimed, the maximum amount of allowable 
depreciation is $10,000 for the year in which the vehicle is 
placed in service, $16,000 for the second year, $9,600 for the 
third year, and $5,760 for the fourth and later years in the 
recovery period.\516\ The limitations are indexed for inflation 
for passenger automobiles placed in service after 2018.
---------------------------------------------------------------------------
    \516\Rev. Proc. 2017-29, Table 3, 2017-14 I.R.B. 1065.
---------------------------------------------------------------------------
      The provision removes computer or peripheral equipment 
from the definition of listed property. Such property is 
therefore not subject to the heightened substantiation 
requirements that apply to listed property.
      Effective date.--The provision is effective for property 
placed in service after December 31, 2017, in taxable years 
ending after such date.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
3. Modifications of treatment of certain farm property (sec. 13203 of 
        the Senate amendment and sec. 168 of the Code)

                              PRESENT LAW

      A taxpayer generally must capitalize the cost of property 
used in a trade or business or held for the production of 
income and recover such cost over time through annual 
deductions for depreciation or amortization.\517\ Tangible 
property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation for different types of property based on an 
assigned applicable depreciation method, recovery period, and 
convention.\518\
---------------------------------------------------------------------------
    \517\See secs. 263(a) and 167. However, where property is not used 
exclusively in a taxpayer's business, the amount eligible for a 
deduction must be reduced by the amount related to personal use. See, 
e.g., section 280A.
    \518\Sec. 168.
---------------------------------------------------------------------------
      The applicable recovery period for an asset is determined 
in part by statute and in part by historical Treasury 
guidance.\519\ The ``type of property'' of an asset is used to 
determine the ``class life'' of the asset, which in turn 
dictates the applicable recovery period for the asset.
---------------------------------------------------------------------------
    \519\Exercising authority granted by Congress, the Secretary issued 
Rev. Proc. 87-56, 1987-2 C.B. 674, laying out the framework of recovery 
periods for enumerated classes of assets. The Secretary clarified and 
modified the list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 
785. In November 1988, Congress revoked the Secretary's authority to 
modify the class lives of depreciable property. Rev. Proc. 87-56, as 
modified, remains in effect except to the extent that the Congress has, 
since 1988, statutorily modified the recovery period for certain 
depreciable assets, effectively superseding any administrative guidance 
with regard to such property.
---------------------------------------------------------------------------
      The MACRS recovery periods applicable to most tangible 
personal property range from three to 20 years. The 
depreciation methods generally applicable to tangible personal 
property are the 200-percent and 150-percent declining balance 
methods,\520\ switching to the straight line method for the 
first taxable year where using the straight line method with 
respect to the adjusted basis as of the beginning of that year 
yields a larger depreciation allowance. The recovery periods 
for most real property are 39 years for nonresidential real 
property and 27.5 years for residential rental property. The 
straight line depreciation method is required for the 
aforementioned real property.
---------------------------------------------------------------------------
    \520\Under the declining balance method the depreciation rate is 
determined by dividing the appropriate percentage (here 150 or 200) by 
the appropriate recovery period. This leads to accelerated depreciation 
when the declining balance percentage is greater than 100. The table 
below illustrates depreciation for an asset with a cost of $1,000 and a 
seven-year recovery period under the 200-percent declining balance 
method, the 150-percent declining balance method, and the straight line 
method. (see endnote for table)
---------------------------------------------------------------------------
      Property used in a farming business is assigned various 
recovery periods in the same manner as other business property. 
For example, depreciable assets used in agriculture activities 
that are assigned a recovery period of 7 years include 
machinery and equipment, grain bins, and fences (but no other 
land improvements), that are used in the production of crops or 
plants, vines, and trees; livestock; the operation of farm 
dairies, nurseries, greenhouses, sod farms, mushrooms cellars, 
cranberry bogs, apiaries, and fur farms; and the performance of 
agriculture, animal husbandry, and horticultural services.\521\ 
Cotton ginning assets are also assigned a recovery period of 7 
years.\522\ Any single purpose agricultural or horticultural 
structure,\523\ and any tree or vine bearing fruit or nuts are 
assigned a recovery period of 10 years.\524\ Land improvements 
such as drainage facilities, paved lots, and water wells are 
assigned a recovery period of 15 years.\525\
---------------------------------------------------------------------------
    \521\Rev. Proc. 87-56, Asset class 01.1, Agriculture.
    \522\Rev. Proc. 87-56, Asset class 01.11, Cotton ginning assets.
    \523\Within the meaning of section 168(i)(13). See also Rev. Proc. 
87-56, Asset class 01.4, Single purpose agricultural or horticultural 
structures. Farm buildings that do not meet the definition of a single 
purpose agricultural or horticultural structure are assigned a recovery 
period of 20 years. Rev. Proc. 87-56, Asset class 01.3, Farm buildings 
except structures included in asset class 01.4.
    \524\Sec. 168(e)(3)(D)(i) and (ii).
    \525\Rev. Proc. 87-56, Asset class 00.3, Land improvements. See 
also, IRS Publication 225, Farmer's Tax Guide (2017).
---------------------------------------------------------------------------
      A 5-year recovery period was assigned to new farm 
machinery or equipment (other than any grain bin, cotton 
ginning asset, fence, or other land improvement) which was used 
in a farming business,\526\ the original use of which commenced 
with the taxpayer after December 31, 2008, and which was placed 
in service before January 1, 2010.\527\
---------------------------------------------------------------------------
    \526\As defined in section 263A(e)(4). See also Treas. Reg. sec. 
1.263A-4(a)(4).
    \527\Sec. 168(e)(3)(B)(vii).
---------------------------------------------------------------------------
      Any property (other than nonresidential real 
property,\528\ residential rental property,\529\ and trees or 
vines bearing fruits or nuts\530\) used in a farming 
business\531\ is subject to the 150-percent declining balance 
method.\532\
---------------------------------------------------------------------------
    \528\Sec. 168(b)(3)(A).
    \529\Sec. 168(b)(3)(B).
    \530\Sec. 168(b)(3)(E).
    \531\Within the meaning of section 263A(e)(4). See also Treas. Reg. 
sec. 1.263A-4(a)(4).
    \532\Sec. 168(b)(2)(B).
---------------------------------------------------------------------------
      Under a special accounting rule, certain taxpayers 
engaged in the business of farming who elect to deduct 
preproductive period expenditures are required to depreciate 
all farming assets using the alternative depreciation system 
(i.e., using longer recovery periods and the straight line 
method).\533\
---------------------------------------------------------------------------
    \533\Sec. 263A(d)(3) and (e)(2)
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision shortens the recovery period from 7 to 5 
years for any machinery or equipment (other than any grain bin, 
cotton ginning asset, fence, or other land improvement) used in 
a farming business, the original use of which commences with 
the taxpayer and is placed in service after December 31, 2017.
      The provision also repeals the required use of the 150-
percent declining balance method for property used in a farming 
business (i.e., for 3-, 5-, 7-, and 10-year property). The 150-
percent declining balance method will continue to apply to any 
15-year or 20-year property used in the farming business to 
which the straight line method does not apply, or to property 
for which the taxpayer elects the use of the 150-percent 
declining balance method.
      For these purposes, the term ``farming business'' means a 
farming business as defined in section 263A(e)(4). Thus, the 
term ``farming business'' means a trade or business involving 
the cultivation of land or the raising or harvesting of any 
agricultural or horticultural commodity (e.g., the trade or 
business of operating a nursery or sod farm; the raising or 
harvesting of trees bearing fruit, nuts, or other crops; the 
raising of ornamental trees (other than evergreen trees that 
are more than six years old at the time they are severed from 
their roots); and the raising, shearing, feeding, caring for, 
training, and management of animals).\534\ A farming business 
includes processing activities that are normally incident to 
the growing, raising, or harvesting of agricultural or 
horticultural products.\535\ A farming business does not 
include contract harvesting of an agricultural or horticultural 
commodity grown or raised by another taxpayer, or merely buying 
and reselling plants or animals grown or raised by another 
taxpayer.\536\
---------------------------------------------------------------------------
    \534\Treas. Reg. sec. 1.263A-4(a)(4)(i).
    \535\Treas. Reg. sec. 1.263A-4(a)(4)(ii).
    \536\Treas. Reg. sec. 1.263A-4(a)(4)(i).
---------------------------------------------------------------------------
      Effective date.--The provision is effective for property 
placed in service after December 31, 2017, in taxable years 
ending after such date.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
4. Applicable recovery period for real property (sec. 13204 of the 
        Senate amendment and sec. 168 of the Code)

                              PRESENT LAW

In general
      A taxpayer generally must capitalize the cost of property 
used in a trade or business or held for the production of 
income and recover such cost over time through annual 
deductions for depreciation or amortization.\537\ Tangible 
property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation for different types of property based on an 
assigned applicable depreciation method, recovery period, and 
convention.\538\
---------------------------------------------------------------------------
    \537\See secs. 263(a) and 167. However, where property is not used 
exclusively in a taxpayer's business, the amount eligible for a 
deduction must be reduced by the amount related to personal use. See, 
e.g., section 280A.
    \538\Sec. 168.
---------------------------------------------------------------------------
            Recovery periods and depreciation methods
      The applicable recovery period for an asset is determined 
in part by statute and in part by historic Treasury 
guidance.\539\ The ``type of property'' of an asset is used to 
determine the ``class life'' of the asset, which in turn 
dictates the applicable recovery period for the asset.
---------------------------------------------------------------------------
    \539\Exercising authority granted by Congress, the Secretary issued 
Rev. Proc. 87-56, 1987-2 C.B. 674, laying out the framework of recovery 
periods for enumerated classes of assets. The Secretary clarified and 
modified the list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 
785. In November 1988, Congress revoked the Secretary's authority to 
modify the class lives of depreciable property. Rev. Proc. 87-56, as 
modified, remains in effect except to the extent that the Congress has, 
since 1988, statutorily modified the recovery period for certain 
depreciable assets, effectively superseding any administrative guidance 
with regard to such property.
---------------------------------------------------------------------------
      The MACRS recovery periods applicable to most tangible 
personal property range from three to 20 years. The 
depreciation methods generally applicable to tangible personal 
property are the 200-percent and 150-percent declining balance 
methods,\540\ switching to the straight line method for the 
first taxable year where using the straight line method with 
respect to the adjusted basis as of the beginning of that year 
yields a larger depreciation allowance. The recovery periods 
for most real property are 39 years for nonresidential real 
property and 27.5 years for residential rental property. The 
straight line depreciation method is required for the 
aforementioned real property.
---------------------------------------------------------------------------
    \540\Under the declining balance method the depreciation rate is 
determined by dividing the appropriate percentage (here 150 or 200) by 
the appropriate recovery period. This leads to accelerated depreciation 
when the declining balance percentage is greater than 100. The table 
below illustrates depreciation for an asset with a cost of $1,000 and a 
seven-year recovery period under the 200-percent declining balance 
method, the 150-percent declining balance method, and the straight line 
method.  (see endnote for table)
---------------------------------------------------------------------------
            Placed-in-service conventions
      Depreciation of an asset begins when the asset is deemed 
to be placed in service under the applicable convention.\541\ 
Under MACRS, nonresidential real property, residential rental 
property, and any railroad grading or tunnel bore generally are 
subject to the mid-month convention, which treats all property 
placed in service during any month (or disposed of during any 
month) as placed in service (or disposed of) on the mid-point 
of such month.\542\ All other property generally is subject to 
the half-year convention, which treats all property placed in 
service during any taxable year (or disposed of during any 
taxable year) as placed in service (or disposed of) on the mid-
point of such taxable year to reflect the assumption that 
assets are placed in service ratably throughout the year.\543\ 
However, if substantial property is placed in service during 
the last three months of a taxable year, a special rule 
requires use of the mid-quarter convention,\544\ designed to 
prevent the recognition of disproportionately large amounts of 
first-year depreciation under the half-year convention.
---------------------------------------------------------------------------
    \541\Treas. Reg. sec. 1.167(a)-10(b).
    \542\Sec. 168(d)(2) and (d)(4)(B).
    \543\Sec. 168(d)(1) and (d)(4)(A).
    \544\The mid-quarter convention treats all property placed in 
service (or disposed of) during any quarter as placed in service (or 
disposed of) on the mid-point of such quarter. Sec. 168(d)(3) and 
(d)(4)(C).
---------------------------------------------------------------------------
            Depreciation of additions or improvements to property
      The recovery period for any addition or improvement to 
real or personal property begins on the later of (1) the date 
on which the addition or improvement is placed in service, or 
(2) the date on which the property with respect to which such 
addition or improvement is made is placed in service.\545\ Any 
MACRS deduction for an addition or improvement to any property 
is to be computed in the same manner as the deduction for the 
underlying property would be if such property were placed in 
service at the same time as such addition or improvement. Thus, 
for example, the cost of an improvement to a building that 
constitutes nonresidential real property is recovered over 39 
years using the straight line method and mid-month convention. 
Certain improvements to nonresidential real property are 
eligible for the additional first-year depreciation deduction 
if the other requirements of section 168(k) are met (i.e., 
improvements that constitute ``qualified improvement 
property'').\546\
---------------------------------------------------------------------------
    \545\Sec. 168(i)(6).
    \546\Sec. 168(k)(2)(A)(i)(IV) and (k)(3). See also section 13201 of 
the bill (Temporary 100-percent expensing for certain business assets).
---------------------------------------------------------------------------
            Qualified improvement property
      Qualified improvement property is any improvement to an 
interior portion of a building that is nonresidential real 
property if such improvement is placed in service after the 
date such building was first placed in service.\547\ Qualified 
improvement property does not include any improvement for which 
the expenditure is attributable to the enlargement of the 
building, any elevator or escalator, or the internal structural 
framework of the building.
---------------------------------------------------------------------------
    \547\Sec. 168(k)(3).
---------------------------------------------------------------------------
            Depreciation of leasehold improvements
      Generally, depreciation allowances for improvements made 
on leased property are determined under MACRS, even if the 
MACRS recovery period assigned to the property is longer than 
the term of the lease.\548\ This rule applies regardless of 
whether the lessor or the lessee places the leasehold 
improvements in service. If a leasehold improvement constitutes 
an addition or improvement to nonresidential real property 
already placed in service, the improvement generally is 
depreciated using the straight-line method over a 39-year 
recovery period, beginning in the month the addition or 
improvement was placed in service. However, exceptions to the 
39-year recovery period exist for certain qualified leasehold 
improvements, qualified restaurant property, and qualified 
retail improvement property.
---------------------------------------------------------------------------
    \548\Sec. 168(i)(8).
---------------------------------------------------------------------------
            Qualified leasehold improvement property
      Section 168(e)(3)(E)(iv) provides a statutory 15-year 
recovery period for qualified leasehold improvement property. 
Qualified leasehold improvement property is any improvement to 
an interior portion of a building that is nonresidential real 
property, provided certain requirements are met.\549\ The 
improvement must be made under or pursuant to a lease either by 
the lessee (or sublessee), or by the lessor, of that portion of 
the building to be occupied exclusively by the lessee (or 
sublessee). The improvement must be placed in service more than 
three years after the date the building was first placed in 
service. Qualified leasehold improvement property does not 
include any improvement for which the expenditure is 
attributable to the enlargement of the building, any elevator 
or escalator, any structural component benefiting a common 
area, or the internal structural framework of the building. If 
a lessor makes an improvement that qualifies as qualified 
leasehold improvement property, such improvement does not 
qualify as qualified leasehold improvement property to any 
subsequent owner of such improvement. An exception to the rule 
applies in the case of death and certain transfers of property 
that qualify for non-recognition treatment.
---------------------------------------------------------------------------
    \549\Sec. 168(e)(6).
---------------------------------------------------------------------------
      Qualified leasehold improvement property is generally 
recovered using the straight-line method and a half-year 
convention,\550\ and is eligible for the additional first-year 
depreciation deduction if the other requirements of section 
168(k) are met.\551\
---------------------------------------------------------------------------
    \550\Sec. 168(b)(3)(G) and (d).
    \551\Sec. 168(k)(2)(A)(i)(IV) and (k)(3). See section 13201 of the 
bill (Temporary 100-percent expensing for certain business assets).
---------------------------------------------------------------------------
            Qualified restaurant property
      Section 168(e)(3)(E)(v) provides a statutory 15-year 
recovery period for qualified restaurant property. Qualified 
restaurant property is any section 1250 property that is a 
building or an improvement to a building, if more than 50 
percent of the building's square footage is devoted to the 
preparation of, and seating for on-premises consumption of, 
prepared meals.\552\ Qualified restaurant property is recovered 
using the straight-line method and a half-year convention.\553\ 
Additionally, qualified restaurant property is not eligible for 
the additional first-year depreciation deduction unless it also 
satisfies the definition of qualified improvement 
property.\554\
---------------------------------------------------------------------------
    \552\Sec. 168(e)(7).
    \553\Sec. 168(b)(3)(H) and (d).
    \554\Sec. 168(e)(7)(B).
---------------------------------------------------------------------------
            Qualified retail improvement property
      Section 168(e)(3)(E)(ix) provides a statutory 15-year 
recovery period for qualified retail improvement property. 
Qualified retail improvement property is any improvement to an 
interior portion of a building which is nonresidential real 
property if such portion is open to the general public\555\ and 
is used in the retail trade or business of selling tangible 
personal property to the general public, and such improvement 
is placed in service more than three years after the date the 
building was first placed in service.\556\ Qualified retail 
improvement property does not include any improvement for which 
the expenditure is attributable to the enlargement of the 
building, any elevator or escalator, any structural component 
benefiting a common area, or the internal structural framework 
of the building.\557\ In the case of an improvement made by the 
owner of such improvement, the improvement is a qualified 
retail improvement only so long as the improvement is held by 
such owner.\558\
---------------------------------------------------------------------------
    \555\Improvements to portions of a building not open to the general 
public (e.g., stock room in back of retail space) do not qualify under 
the provision.
    \556\Sec. 168(e)(8).
    \557\Sec. 168(e)(8)(C).
    \558\Sec. 168(e)(8)(B). Rules similar to section 168(e)(6)(B) apply 
in the case of death and certain transfers of property that qualify for 
non-recognition treatment.
---------------------------------------------------------------------------
      Retail establishments that qualify for the 15-year 
recovery period include those primarily engaged in the sale of 
goods. Examples of these retail establishments include, but are 
not limited to, grocery stores, clothing stores, hardware 
stores, and convenience stores. Establishments primarily 
engaged in providing services, such as professional services, 
financial services, personal services, health services, and 
entertainment, do not qualify. Generally, it is intended that 
businesses defined as a store retailer under the current North 
American Industry Classification System (industry sub-sectors 
441 through 453) qualify while those in other industry classes 
do not qualify.\559\
---------------------------------------------------------------------------
    \559\Joint Committee on Taxation, General Explanation of Tax 
Legislation Enacted in the 110th Congress (JCS-1-09), March 2009, p. 
402.
---------------------------------------------------------------------------
      Qualified retail improvement property is recovered using 
the straight-line method and a half-year convention,\560\ and 
is eligible for the additional first-year depreciation 
deduction if the other requirements of section 168(k) are 
met.\561\
---------------------------------------------------------------------------
    \560\Sec. 168(b)(3)(I) and (d).
    \561\Sec. 168(k)(2)(A)(i)(IV) and (k)(3). See section 13301 of the 
bill (Temporary 100-percent expensing for certain business assets).
---------------------------------------------------------------------------
            Alternative depreciation system
      The alternative depreciation system (``ADS'') is required 
to be used for tangible property used predominantly outside the 
United States, certain tax-exempt use property, tax-exempt bond 
financed property, and certain imported property covered by an 
Executive order.\562\ An election to use ADS is available to 
taxpayers for any class of property for any taxable year.\563\ 
Under ADS, all property is depreciated using the straight line 
method over recovery periods which generally are equal to the 
class life of the property, with certain exceptions.\564\ For 
example nonresidential real and residential rental property 
have a 40-year ADS recovery period, while qualified leasehold 
improvement property, qualified restaurant property, and 
qualified retail improvement property have a 39-year ADS 
recovery period.\565\
---------------------------------------------------------------------------
    \562\Sec. 168(g).
    \563\Sec. 168(g)(7).
    \564\Sec. 168(g)(2) and (3).
    \565\Sec. 168(g)(3).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision shortens the recovery period for 
determining the depreciation deduction with respect to 
nonresidential real and residential rental property to 25 
years. As a conforming amendment, the provision changes the 
statutory recovery period for nonresidential real and 
residential rental property to 25 years for purposes of 
determining whether a rental agreement is a long-term agreement 
under the section 467 rules applicable to certain payments for 
the use of property or services.\566\ The provision also 
shortens the ADS recovery period for residential rental 
property from 40 years to 30 years.
---------------------------------------------------------------------------
    \566\A long-term section 467 rental agreement is a lease of 
property for a term in excess of 75 percent of the property's statutory 
recovery period. Sec. 467(b)(4)(A) and (e)(3)(A). A disqualified long-
term agreement is one that has as one of its principal purposes the 
avoidance of taxes. Sec. 467(b)(4)(B).
---------------------------------------------------------------------------
      The provision eliminates the separate definitions of 
qualified leasehold improvement, qualified restaurant, and 
qualified retail improvement property, and provides a general 
10-year recovery period for qualified improvement 
property,\567\ and a 20-year ADS recovery period for such 
property. Thus, for example, qualified improvement property 
placed in service after December 31, 2017, is generally 
depreciable over 10 years using the straight line method and 
half-year convention, without regard to whether the 
improvements are property subject to a lease, placed in service 
more than three years after the date the building was first 
placed in service, or made to a restaurant building. Restaurant 
building property placed in service after December 31, 2017, 
that does not meet the definition of qualified improvement 
property is depreciable over 25 years as nonresidential real 
property, using the straight line method and the mid-month 
convention.
---------------------------------------------------------------------------
    \567\Described in present law section 168(k)(3).
---------------------------------------------------------------------------
      As a conforming amendment, the provision replaces the 
references in section 179(f) to qualified leasehold improvement 
property, qualified restaurant property, and qualified retail 
improvement property with a reference to qualified improvement 
property.\568\ Thus, for example, the provision allows section 
179 expensing for improvement property without regard to 
whether the improvements are property subject to a lease, 
placed in service more than three years after the date the 
building was first placed in service, or made to a restaurant 
building. Restaurant building property placed in service after 
December 31, 2017, that does not meet the definition of 
qualified improvement property is not eligible for section 179 
expensing.
---------------------------------------------------------------------------
    \568\For additional changes to section 179, see section 13101 of 
the Senate amendment (Modifications of rules for expensing depreciable 
business assets).
---------------------------------------------------------------------------
      The provision also requires a real property trade or 
business\569\ electing out of the limitation on the deduction 
for interest to use ADS to depreciate any of its nonresidential 
real property, residential rental property, and qualified 
improvement property.
---------------------------------------------------------------------------
    \569\As defined in section 13301 of the Senate amendment 
(Limitation on deduction for interest), by cross reference to section 
469(c)(7)(C) (i.e., any real property development, redevelopment, 
construction, reconstruction, acquisition, conversion, rental, 
operation, management, leasing, or brokerage trade or business). Note 
that a mortgage broker who is a broker of financial instruments is not 
in a real property trade or business for this purpose. See, e.g., CCA 
201504010 (December 17, 2014).
---------------------------------------------------------------------------
      Effective date.--The provision is effective for property 
placed in service after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
except that it maintains the present law general MACRS recovery 
periods of 39 and 27.5 years for nonresidential real and 
residential rental property, respectively. In addition, the 
conference agreement provides a general 15-year MACRS recovery 
period for qualified improvement property.
5. Use of alternative depreciation system for electing farming 
        businesses (sec. 13205 of the Senate amendment and sec. 168 of 
        the Code)

                              PRESENT LAW

In general
      A taxpayer generally must capitalize the cost of property 
used in a trade or business or held for the production of 
income and recover such cost over time through annual 
deductions for depreciation or amortization.\570\ Tangible 
property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation for different types of property based on an 
assigned applicable depreciation method, recovery period, and 
convention.\571\
---------------------------------------------------------------------------
    \570\See secs. 263(a) and 167. However, where property is not used 
exclusively in a taxpayer's business, the amount eligible for a 
deduction must be reduced by the amount related to personal use. See, 
e.g., section 280A.
    \571\Sec. 168.
---------------------------------------------------------------------------
      The applicable recovery period for an asset is determined 
in part by statute and in part by historic Treasury 
guidance.\572\ The ``type of property'' of an asset is used to 
determine the ``class life'' of the asset, which in turn 
dictates the applicable recovery period for the asset.
---------------------------------------------------------------------------
    \572\Exercising authority granted by Congress, the Secretary issued 
Rev. Proc. 87-56, 1987-2 C.B. 674, laying out the framework of recovery 
periods for enumerated classes of assets. The Secretary clarified and 
modified the list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 
785. In November 1988, Congress revoked the Secretary's authority to 
modify the class lives of depreciable property. Rev. Proc. 87-56, as 
modified, remains in effect except to the extent that the Congress has, 
since 1988, statutorily modified the recovery period for certain 
depreciable assets, effectively superseding any administrative guidance 
with regard to such property.
---------------------------------------------------------------------------
      The MACRS recovery periods applicable to most tangible 
personal property range from three to 20 years. The 
depreciation methods generally applicable to tangible personal 
property are the 200-percent and 150-percent declining balance 
methods,\573\ switching to the straight line method for the 
first taxable year where using the straight line method with 
respect to the adjusted basis as of the beginning of that year 
yields a larger depreciation allowance. The recovery periods 
for most real property are 39 years for nonresidential real 
property and 27.5 years for residential rental property.\574\ 
The straight line depreciation method is required for the 
aforementioned real property.
---------------------------------------------------------------------------
    \573\Under the declining balance method the depreciation rate is 
determined by dividing the appropriate percentage (here 150 or 200) by 
the appropriate recovery period. This leads to accelerated depreciation 
when the declining balance percentage is greater than 100. The table 
below illustrates depreciation for an asset with a cost of $1,000 and a 
seven-year recovery period under the 200-percent declining balance 
method, the 150-percent declining balance method, and the straight line 
method. (see endnote for table)
    \574\However, section 13204 of the bill (Applicable recovery period 
for real property) reduces the recovery period to 25 years for both 
nonresidential real property and residential rental property.
---------------------------------------------------------------------------
      Property used in a farming business is assigned various 
recovery periods in the same manner as other business property. 
For example, depreciable assets used in agriculture activities 
that are assigned a recovery period of 7 years include 
machinery and equipment, grain bins, and fences (but no other 
land improvements), that are used in the production of crops or 
plants, vines, and trees; livestock; the operation of farm 
dairies, nurseries, greenhouses, sod farms, mushrooms cellars, 
cranberry bogs, apiaries, and fur farms; and the performance of 
agriculture, animal husbandry, and horticultural services.\575\ 
Cotton ginning assets are also assigned a recovery period of 7 
years.\576\ Any single purpose agricultural or horticultural 
structure,\577\ and any tree or vine bearing fruit or nuts are 
assigned a recovery period of 10 years.\578\ Land improvements 
such as drainage facilities, paved lots, and water wells are 
assigned a recovery period of 15 years.\579\
---------------------------------------------------------------------------
    \575\Rev. Proc. 87-56, Asset class 01.1, Agriculture.
    \576\Rev. Proc. 87-56, Asset class 01.11, Cotton ginning assets.
    \577\Within the meaning of section 168(i)(13). See also Rev. Proc. 
87-56, Asset class 01.4, Single purpose agricultural or horticultural 
structures. Farm buildings that do not meet the definition of a single 
purpose agricultural or horticultural structure are assigned a recovery 
period of 20 years. Rev. Proc. 87-56, Asset class 01.3, Farm buildings 
except structures included in asset class 01.4.
    \578\Sec. 168(e)(3)(D)(i) and (ii).
    \579\Rev. Proc. 87-56, Asset class 00.3, Land improvements. See 
also, IRS Publication 225, Farmer's Tax Guide (2017).
---------------------------------------------------------------------------
      A 5-year recovery period was assigned to new farm 
machinery or equipment (other than any grain bin, cotton 
ginning asset, fence, or other land improvement) which was used 
in a farming business,\580\ the original use of which commenced 
with the taxpayer after December 31, 2008, and which was placed 
in service before January 1, 2010.\581\
---------------------------------------------------------------------------
    \580\As defined in section 263A(e)(4).
    \581\Sec. 168(e)(3)(B)(vii). However, section 13203 of the bill 
(Modifications of treatment of certain farm property) also shortens the 
recovery period from 7 to 5 years for any machinery or equipment (other 
than any grain bin, cotton ginning asset, fence, or other land 
improvement) which is used in a farming business, the original use of 
which commences with the taxpayer and is placed in service after 
December 31, 2017.
---------------------------------------------------------------------------
      Any property (other than nonresidential real 
property,\582\ residential rental property,\583\ and trees or 
vines bearing fruits or nuts\584\) used in a farming 
business\585\ is subject to the 150-percent declining balance 
method.\586\
---------------------------------------------------------------------------
    \582\Sec. 168(b)(3)(A).
    \583\Sec. 168(b)(3)(B).
    \584\Sec. 168(b)(3)(E).
    \585\Within the meaning of section 263A(e)(4).
    \586\Sec. 168(b)(2)(B). However, section 13203 of the bill 
(Modifications of treatment of certain farm property) repeals the 
required use of the 150-percent declining balance method for property 
used in a farming business (i.e., for 3-, 5-, 7-, and 10-year 
property). The 150-percent declining balance method will continue to 
apply to any 15-year or 20-year property used in the farming business 
to which the straight line method does not apply, or to property for 
which the taxpayer elects the use of the 150-percent declining balance 
method.
---------------------------------------------------------------------------
Alternative depreciation system
      The alternative depreciation system (``ADS'') is required 
to be used for tangible property used predominantly outside the 
United States, certain tax-exempt use property, tax-exempt bond 
financed property, and certain imported property covered by an 
Executive order.\587\ An election to use ADS is available to 
taxpayers for any class of property for any taxable year.\588\ 
Under ADS, all property is depreciated using the straight line 
method over recovery periods which generally are equal to the 
class life of the property, with certain exceptions.\589\ For 
example, any single purpose agricultural or horticultural 
structure has a 15-year ADS recovery period,\590\ while any 
tree or vine bearing fruit or nuts has a 20-year ADS recovery 
period.\591\ Similarly, land improvements such as drainage 
facilities, paved lots, and water wells have an ADS recovery 
period of 20 years.\592\
---------------------------------------------------------------------------
    \587\Sec. 168(g).
    \588\Sec. 168(g)(7).
    \589\Sec. 168(g)(2) and (3).
    \590\Sec. 168(g)(3)(B). Farm buildings that do not meet the 
definition of a single purpose agricultural or horticultural structure 
have an ADS recovery period of 25 years. Rev. Proc. 87-56, Asset class 
01.3, Farm buildings except structures included in asset class 01.4.
    \591\Sec. 168(g)(3)(B).
    \592\Rev. Proc. 87-56, Asset class 00.3, Land improvements.
---------------------------------------------------------------------------
      Under a special accounting rule, certain taxpayers 
engaged in the business of farming who elect to deduct 
preproductive period expenditures under the uniform 
capitalization rules are required to depreciate all farming 
assets using ADS.\593\
---------------------------------------------------------------------------
    \593\Sec. 263A(d)(3) and (e)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision requires an electing farming business,\594\ 
i.e., a farming business electing out of the limitation on the 
deduction for interest,\595\ to use ADS to depreciate any 
property with a recovery period of 10 years or more (e.g., 
property such as single purpose agricultural or horticultural 
structures, trees or vines bearing fruit or nuts, farm 
buildings, and certain land improvements).
---------------------------------------------------------------------------
    \594\As defined in section 13301 of the Senate amendment 
(Limitation on deduction for interest), by cross reference to section 
263A(e)(4) (i.e., farming business means the trade or business of 
farming and includes the trade or business of operating a nursery or 
sod farm, or the raising or harvesting of trees bearing fruit, nuts, or 
other crops, or ornamental trees (other than evergreen trees that are 
more than six years old at the time they are severed from their 
roots)). Treas. Reg. sec. 1.263A-4(a)(4) further defines a farming 
business as a trade or business involving the cultivation of land or 
the raising or harvesting of any agricultural or horticultural 
commodity. Examples of a farming business include the trade or business 
of operating a nursery or sod farm; the raising or harvesting of trees 
bearing fruit, nuts, or other crops; the raising of ornamental trees 
(other than evergreen trees that are more than six years old at the 
time they are severed from their roots); and the raising, shearing, 
feeding, caring for, training, and management of animals. A farming 
business also includes processing activities that are normally incident 
to the growing, raising, or harvesting of agricultural or horticultural 
products. See Treas. Reg. sec. 1.263A-4(a)(4)(i) and (ii). A farming 
business does not include contract harvesting of an agricultural or 
horticultural commodity grown or raised by another taxpayer, or merely 
buying and reselling plants or animals grown or raised by another 
taxpayer. See Treas. Reg. sec. 1.263A-4(a)(4)(i).
    \595\See section 13301 of the Senate amendment (Limitation on 
deduction for interest). Section 13301 of the Senate amendment also 
includes an exception from the limitation on the deduction for interest 
for taxpayers meeting the $15 million gross receipts test.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
6. Expensing of certain costs of replanting citrus plants lost by 
        reason of casualty (sec. 13207 of the Senate amendment and sec. 
        263A of the Code)

                              PRESENT LAW

In general
      The uniform capitalization (``UNICAP'') rules, which were 
enacted as part of the Tax Reform Act of 1986,\596\ require 
certain direct and indirect costs allocable to real or tangible 
personal property produced by the taxpayer to be either 
capitalized into the basis of such property or included in 
inventory, as applicable.\597\ For real or personal property 
acquired by the taxpayer for resale, section 263A generally 
requires certain direct and indirect costs allocable to such 
property to be either capitalized into the basis of such 
property or included in inventory, as applicable.
---------------------------------------------------------------------------
    \596\Sec. 803(a) of Pub. L. No. 99-514 (1986).
    \597\Sec. 263A.
---------------------------------------------------------------------------
      Section 263A generally requires the capitalization of the 
direct and indirect costs allocable to the production of any 
property in a farming business, including animals and plants 
without regard to the length of their preproductive 
period.\598\ The costs of a plant generally required to be 
capitalized under section 263(a) include preparatory costs 
incurred so that the plant's growing process may begin, such as 
the acquisition costs of the seed, seedling, or plant. Under 
section 263A, the costs of producing a plant generally required 
to be capitalized also include the preproductive period costs 
of planting, cultivating, maintaining, and developing the plant 
during the preproductive period.\599\ Preproductive period 
costs may include management, irrigation, pruning, soil and 
water conservation, fertilizing, frost protection, spraying, 
harvesting, storage and handling, upkeep, electricity, tax 
depreciation and repairs on buildings and equipment used in 
raising the plants, farm overhead, taxes, and interest, as 
applicable.\600\
---------------------------------------------------------------------------
    \598\Treas. Reg. sec. 1.263A-4(b)(1).
    \599\Treas. Reg. sec. 1.263A-4(b)(1)(i).
    \600\Ibid.
---------------------------------------------------------------------------
Special rules for plant farmers
      Section 263A provides an exception to the general 
capitalization requirements for taxpayers who raise, harvest, 
or grow trees.\601\ Under this exception, section 263A does not 
apply to trees raised, harvested, or grown by the taxpayer 
(other than trees bearing fruit, nuts, or other crops, or 
ornamental trees) and any real property underlying such trees. 
Similarly, the UNICAP rules do not apply to any plant having a 
preproductive period of two years or less, which is produced by 
a taxpayer in a farming business (unless the taxpayer is 
required to use an accrual method of accounting under section 
447 or 448(a)(3)).\602\ Hence, in general, the UNICAP rules 
apply to the production of plants that have a preproductive 
period of more than two years, and to taxpayers required to use 
an accrual method of accounting.
---------------------------------------------------------------------------
    \601\Sec. 263A(c)(5).
    \602\Sec. 263A(d).
---------------------------------------------------------------------------
      Plant farmers otherwise required to capitalize 
preproductive period costs may elect to deduct such costs 
currently, provided the alternative depreciation system 
described in section 168(g)(2) is used on all farm assets and 
the preproductive period costs are recaptured upon disposition 
of the product.\603\ The election is not available to taxpayers 
required to use the accrual method of accounting. Moreover, the 
election is not available with respect to certain costs 
attributable to planting, cultivating, maintaining, or 
developing citrus or almond groves.
---------------------------------------------------------------------------
    \603\Sec. 263A(d)(3), (e)(1), and (e)(2).
---------------------------------------------------------------------------
      Section 263A does not apply to costs incurred in 
replanting edible crops for human consumption following loss or 
damage due to freezing temperatures, disease, drought, pests, 
or casualty.\604\ The same type of crop as the lost or damaged 
crop must be replanted. However, the exception to 
capitalization still applies if the replanting occurs on a 
parcel of land other than the land on which the damage occurred 
provided the acreage of the new land does not exceed that of 
the land to which the damage occurred and the new land is 
located in the United States. This exception may also apply to 
costs incurred by persons other than the taxpayer who incurred 
the loss or damage, provided (1) the taxpayer who incurred the 
loss or damage retains an equity interest of more than 50 
percent in the property on which the loss or damage occurred at 
all times during the taxable year in which the replanting costs 
are paid or incurred, and (2) the person holding a minority 
equity interest and claiming the deduction materially 
participates in the planting, maintenance, cultivation, or 
development of the property during the taxable year in which 
the replanting costs are paid or incurred.\605\
---------------------------------------------------------------------------
    \604\Sec. 263A(d)(2). Such replanting costs generally include costs 
attributable to the replanting, cultivating, maintaining, and 
developing of the plants that were lost or damaged that are incurred 
during the preproductive period. Treas. Reg. sec. 1.263A-4(e)(1). The 
acquisition costs of the replacement trees or seedlings must still be 
capitalized under section 263(a) (see, e.g., T.D. 8897, 65 FR 50638, 
Treas. Reg. sec. 1.263A-4(e)(3), Examples 1-3, and TAM 9547002 (July 
18, 1995)), potentially subject to the special bonus depreciation 
deduction in the year of planting under section 168(k)(5).
    \605\Sec. 263A(d)(2)(B). Material participation for this purpose is 
determined in a similar manner as under section 2032A(e)(6) (relating 
to qualified use valuation of farm property upon death of the 
taxpayer).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision modifies the special rule for costs 
incurred by persons other than the taxpayer in connection with 
replanting an edible crop for human consumption following loss 
or damage due to casualty. Under the provision, with respect to 
replanting costs paid or incurred after the date of enactment, 
but no later than a date which is ten years after such date of 
enactment, for citrus plants lost or damaged due to casualty, 
such replanting costs may also be deducted by a person other 
than the taxpayer if (1) the taxpayer has an equity interest of 
not less than 50 percent in the replanted citrus plants at all 
times during the taxable year in which the replanting costs are 
paid or incurred and such other person holds any part of the 
remaining equity interest, or (2) such other person acquires 
all of the taxpayer's equity interest in the land on which the 
lost or damaged citrus plants were located at the time of such 
loss or damage, and the replanting is on such land.
      Effective date.--The provision is effective for costs 
paid or incurred after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

                       C. Small Business Reforms

1. Expansion of section 179 expensing (sec. 3201 of the House bill, 
        sec. 13101 of the Senate amendment, and sec. 179 of the Code)

                              PRESENT LAW

      A taxpayer generally must capitalize the cost of property 
used in a trade or business or held for the production of 
income and recover such cost over time through annual 
deductions for depreciation or amortization.\606\ Tangible 
property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation for different types of property based on an 
assigned applicable depreciation method, recovery period,\607\ 
and convention.\608\
---------------------------------------------------------------------------
    \606\See secs. 263(a) and 167. However, where property is not used 
exclusively in a taxpayer's business, the amount eligible for a 
deduction must be reduced by the amount related to personal use. See, 
e.g., section 280A.
    \607\The applicable recovery period for an asset is determined in 
part by statute and in part by historic Treasury guidance. Exercising 
authority granted by Congress, the Secretary issued Rev. Proc. 87-56, 
1987-2 C.B. 674, laying out the framework of recovery periods for 
enumerated classes of assets. The Secretary clarified and modified the 
list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November 
1988, Congress revoked the Secretary's authority to modify the class 
lives of depreciable property. Rev. Proc. 87-56, as modified, remains 
in effect except to the extent that the Congress has, since 1988, 
statutorily modified the recovery period for certain depreciable 
assets, effectively superseding any administrative guidance with regard 
to such property.
    \608\Sec. 168.
---------------------------------------------------------------------------
Election to expense certain depreciable business assets
      A taxpayer may elect under section 179 to deduct (or 
``expense'') the cost of qualifying property, rather than to 
recover such costs through depreciation deductions, subject to 
limitation. The maximum amount a taxpayer may expense is 
$500,000 of the cost of qualifying property placed in service 
for the taxable year.\609\ The $500,000 amount is reduced (but 
not below zero) by the amount by which the cost of qualifying 
property placed in service during the taxable year exceeds 
$2,000,000.\610\ The $500,000 and $2,000,000 amounts are 
indexed for inflation for taxable years beginning after 
2015.\611\
---------------------------------------------------------------------------
    \609\Sec. 179(b)(1).
    \610\Sec. 179(b)(2).
    \611\Sec. 179(b)(6).
---------------------------------------------------------------------------
      In general, qualifying property is defined as depreciable 
tangible personal property that is purchased for use in the 
active conduct of a trade or business. Qualifying property also 
includes off-the-shelf computer software and qualified real 
property (i.e., qualified leasehold improvement property, 
qualified restaurant property, and qualified retail improvement 
property).\612\ Qualifying property excludes any property 
described in section 50(b) (i.e., certain property not eligible 
for the investment tax credit).\613\
---------------------------------------------------------------------------
    \612\Sec. 179(d)(1)(A)(ii) and (f).
    \613\Sec. 179(d)(1) flush language. Property described in section 
50(b) is generally property used outside the United States, certain 
property used for lodging, property used by certain tax exempt 
organizations, and property used by governmental units and foreign 
persons or entities.
---------------------------------------------------------------------------
      Passenger automobiles subject to the section 280F 
limitation are eligible for section 179 expensing only to the 
extent of the dollar limitations in section 280F. For sport 
utility vehicles above the 6,000 pound weight rating and not 
more than the 14,000 pound weight rating, which are not subject 
to the limitation under section 280F, the maximum cost that may 
be expensed for any taxable year under section 179 is $25,000 
(the ``sport utility vehicle limitation'').\614\
---------------------------------------------------------------------------
    \614\Sec. 179(b)(5). For this purpose, a sport utility vehicle is 
defined to exclude any vehicle that: (1) is designed for more than nine 
individuals in seating rearward of the driver's seat; (2) is equipped 
with an open cargo area, or a covered box not readily accessible from 
the passenger compartment, of at least six feet in interior length; or 
(3) has an integral enclosure, fully enclosing the driver compartment 
and load carrying device, does not have seating rearward of the 
driver's seat, and has no body section protruding more than 30 inches 
ahead of the leading edge of the windshield.
---------------------------------------------------------------------------
      The amount eligible to be expensed for a taxable year may 
not exceed the taxable income for such taxable year that is 
derived from the active conduct of a trade or business 
(determined without regard to this provision).\615\ Any amount 
that is not allowed as a deduction because of the taxable 
income limitation may be carried forward to succeeding taxable 
years (subject to limitations).
---------------------------------------------------------------------------
    \615\Sec. 179(b)(3).
---------------------------------------------------------------------------
      No general business credit under section 38 is allowed 
with respect to any amount for which a deduction is allowed 
under section 179.\616\ If a corporation makes an election 
under section 179 to deduct expenditures, the full amount of 
the deduction does not reduce earnings and profits. Rather, the 
expenditures that are deducted reduce corporate earnings and 
profits ratably over a five-year period.\617\
---------------------------------------------------------------------------
    \616\Sec. 179(d)(9).
    \617\Sec. 312(k)(3)(B).
---------------------------------------------------------------------------
      An expensing election is made under rules prescribed by 
the Secretary.\618\ In general, any election or specification 
made with respect to any property may not be revoked except 
with the consent of the Commissioner. However, an election or 
specification under section 179 may be revoked by the taxpayer 
without consent of the Commissioner.
---------------------------------------------------------------------------
    \618\Sec. 179(c)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision increases the maximum amount a taxpayer may 
expense under section 179 to $5,000,000, and increases the 
phase-out threshold amount to $20,000,000 for five taxable 
years, i.e., for taxable years beginning in 2018, 2019, 2020, 
2021 and 2022. Thus, the provision provides that the maximum 
amount a taxpayer may expense, for taxable years beginning 
after 2017 and before 2023, is $5,000,000 of the cost of 
qualifying property placed in service for the taxable year. The 
$5,000,000 amount is reduced (but not below zero) by the amount 
by which the cost of qualifying property placed in service 
during the taxable year exceeds $20,000,000. The $5,000,000 and 
$20,000,000 amounts are indexed for inflation for taxable years 
beginning after 2018.
      The provision also expands the definition of qualified 
real property under section 179 to include qualified energy 
efficient heating and air-conditioning property acquired and 
placed in service by the taxpayer after November 2, 2017. For 
purposes of the provision, qualified energy efficient heating 
and air-conditioning property means any depreciable section 
1250 property that is (i) installed as part of a building's 
heating, cooling, ventilation, or hot water system, and (ii) 
within the scope of Standard 90.1-2007 of the American Society 
of Heating, Refrigerating, and Air-Conditioning Engineers and 
the Illuminating Engineering Society of North America (as in 
effect on the day before the date of the adoption of Standard 
90.1-2010 of such Societies) or any successor standard.
      Effective date.--The increased dollar limitations under 
section 179 apply to taxable years beginning after December 31, 
2017.
      The expansion of qualified real property to include 
qualified energy efficient heating and air-conditioning 
property applies to property acquired\619\ and placed in 
service after November 2, 2017.
---------------------------------------------------------------------------
    \619\Property is not treated as acquired after the date on which a 
written binding contract is entered into for such acquisition.
---------------------------------------------------------------------------

                            SENATE AMENDMENT

      The provision increases the maximum amount a taxpayer may 
expense under section 179 to $1,000,000, and increases the 
phase-out threshold amount to $2,500,000. Thus, the provision 
provides that the maximum amount a taxpayer may expense, for 
taxable years beginning after 2017, is $1,000,000 of the cost 
of qualifying property placed in service for the taxable year. 
The $1,000,000 amount is reduced (but not below zero) by the 
amount by which the cost of qualifying property placed in 
service during the taxable year exceeds $2,500,000. The 
$1,000,000 and $2,500,000 amounts, as well as the $25,000 sport 
utility vehicle limitation, are indexed for inflation for 
taxable years beginning after 2018.
      The provision expands the definition of section 179 
property to include certain depreciable tangible personal 
property used predominantly to furnish lodging or in connection 
with furnishing lodging.\620\
---------------------------------------------------------------------------
    \620\As defined in section 50(b)(2). Property used predominantly to 
furnish lodging or in connection with furnishing lodging generally 
includes, e.g., beds and other furniture, refrigerators, ranges, and 
other equipment used in the living quarters of a lodging facility such 
as an apartment house, dormitory, or any other facility (or part of a 
facility) where sleeping accommodations are provided and let. See 
Treas. Reg. sec. 1.48-1(h).
---------------------------------------------------------------------------
      The provision also expands the definition of qualified 
real property eligible for section 179 expensing to include any 
of the following improvements to nonresidential real property 
placed in service after the date such property was first placed 
in service: roofs; heating, ventilation, and air-conditioning 
property; fire protection and alarm systems; and security 
systems.
      Effective date.--The provision applies to property placed 
in service in taxable years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

  2. Small business accounting method reform and simplification (sec. 
    3202 of the House bill, secs. 13102 through 13105 of the Senate 
       amendment, and secs. 263A, 448, 460, and 471 of the Code)

                              PRESENT LAW

General rule for methods of accounting
      Section 446 generally allows a taxpayer to select the 
method of accounting to be used to compute taxable income, 
provided that such method clearly reflects the income of the 
taxpayer. The term ``method of accounting'' includes not only 
the overall method of accounting used by the taxpayer, but also 
the accounting treatment of any one item.\621\ Permissible 
overall methods of accounting include the cash receipts and 
disbursements method (``cash method''), an accrual method, or 
any other method (including a hybrid method) permitted under 
regulations prescribed by the Secretary.\622\ Examples of any 
one item for which an accounting method may be adopted include 
cost recovery,\623\ revenue recognition,\624\ and timing of 
deductions.\625\ For each separate trade or business, a 
taxpayer is entitled to adopt any permissible method, subject 
to certain restrictions.\626\
---------------------------------------------------------------------------
    \621\Treas. Reg. sec. 1.446-1(a)(1).
    \622\Sec. 446(c).
    \623\See, e.g., secs. 167 and 168.
    \624\See, e.g., secs. 451 and 460.
    \625\See, e.g., secs. 461 and 467.
    \626\Sec. 446(d); Treas. Reg. sec. 1.446-1(d).
---------------------------------------------------------------------------
      A taxpayer filing its first return may adopt any 
permissible method of accounting in computing taxable income 
for such year.\627\ Except as otherwise provided, section 
446(e) requires taxpayers to secure consent of the Secretary 
before changing a method of accounting. The regulations under 
this section provide rules for determining: (1) what a method 
of accounting is, (2) how an adoption of a method of accounting 
occurs, and (3) how a change in method of accounting is 
effectuated.\628\
---------------------------------------------------------------------------
    \627\Treas. Reg. sec. 1.446-1(e)(1).
    \628\Treas. Reg. sec. 1.446-1(e).
---------------------------------------------------------------------------
Cash and accrual methods
      Taxpayers using the cash method generally recognize items 
of income when actually or constructively received and items of 
expense when paid. The cash method is administratively easy and 
provides the taxpayer flexibility in the timing of income 
recognition. It is the method generally used by most individual 
taxpayers, including farm and nonfarm sole proprietorships.
      Taxpayers using an accrual method generally accrue items 
of income when all the events have occurred that fix the right 
to receive the income and the amount of the income can be 
determined with reasonable accuracy.\629\ Taxpayers using an 
accrual method of accounting generally may not deduct items of 
expense prior to when all events have occurred that fix the 
obligation to pay the liability, the amount of the liability 
can be determined with reasonable accuracy, and economic 
performance has occurred.\630\ Accrual methods of accounting 
generally result in a more accurate measure of economic income 
than does the cash method. The accrual method is often used by 
businesses for financial accounting purposes.
---------------------------------------------------------------------------
    \629\See, e.g., sec. 451.
    \630\See, e.g., sec. 461.
---------------------------------------------------------------------------
      A C corporation, a partnership that has a C corporation 
as a partner, or a tax-exempt trust or corporation with 
unrelated business income generally may not use the cash 
method. Exceptions are made for farming businesses, qualified 
personal service corporations, and the aforementioned entities 
to the extent their average annual gross receipts do not exceed 
$5 million for all prior years (including the prior taxable 
years of any predecessor of the entity) (the ``gross receipts 
test''). The cash method may not be used by any tax 
shelter.\631\ In addition, the cash method generally may not be 
used if the purchase, production, or sale of merchandise is an 
income producing factor.\632\ Such taxpayers generally are 
required to keep inventories and use an accrual method with 
respect to inventory items.\633\
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    \631\Secs. 448(a)(3) and (d)(3) and 461(i)(3) and (4). For this 
purpose, a tax shelter includes: (1) any enterprise (other than a C 
corporation) if at any time interests in such enterprise have been 
offered for sale in any offering required to be registered with any 
Federal or State agency having the authority to regulate the offering 
of securities for sale; (2) any syndicate (within the meaning of 
section 1256(e)(3)(B)); or (3) any tax shelter as defined in section 
6662(d)(2)(C)(ii). In the case of a farming trade or business, a tax 
shelter includes any tax shelter as defined in section 
6662(d)(2)(C)(ii) or any partnership or any other enterprise other than 
a corporation which is not an S corporation engaged in the trade or 
business of farming, (1) if at any time interests in such partnership 
or enterprise have been offered for sale in any offering required to be 
registered with any Federal or State agency having authority to 
regulate the offering of securities for sale or (2) if more than 35 
percent of the losses during any period are allocable to limited 
partners or limited entrepreneurs.
    \632\Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
    \633\Sec. 471 and Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
---------------------------------------------------------------------------
      A farming business is defined as a trade or business of 
farming, including operating a nursery or sod farm, or the 
raising or harvesting of trees bearing fruit, nuts, or other 
crops, timber, or ornamental trees.\634\ Such farming 
businesses are not precluded from using the cash method 
regardless of whether they meet the gross receipts test. 
However, section 447 generally requires a farming C corporation 
(and any farming partnership if a corporation is a partner in 
such partnership) to use an accrual method of accounting. 
Section 447 does not apply to nursery or sod farms, to the 
raising or harvesting of trees (other than fruit and nut 
trees), nor to farming C corporations meeting a gross receipts 
test with a $1 million threshold. For family farm C 
corporations, the threshold under the gross receipts test is 
$25 million.
---------------------------------------------------------------------------
    \634\Sec. 448(d)(1).
---------------------------------------------------------------------------
      A qualified personal service corporation is a 
corporation: (1) substantially all of whose activities involve 
the performance of services in the fields of health, law, 
engineering, architecture, accounting, actuarial science, 
performing arts, or consulting, and (2) substantially all of 
the stock of which is owned by current or former employees 
performing such services, their estates, or heirs.\635\ 
Qualified personal service corporations are allowed to use the 
cash method without regard to whether they meet the gross 
receipts test.
---------------------------------------------------------------------------
    \635\Sec. 448(d)(2).
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Accounting for inventories
      In general, for Federal income tax purposes, taxpayers 
must account for inventories if the production, purchase, or 
sale of merchandise is an income-producing factor to the 
taxpayer.\636\ Treasury regulations also provide that in any 
case in which the use of inventories is necessary to clearly 
reflect income, the accrual method must be used with regard to 
purchases and sales.\637\ However, an exception is provided for 
taxpayers whose average annual gross receipts do not exceed $1 
million.\638\ A second exception is provided for taxpayers in 
certain industries whose average annual gross receipts do not 
exceed $10 million and that are not otherwise prohibited from 
using the cash method under section 448.\639\ Such taxpayers 
may account for inventory as materials and supplies that are 
not incidental (i.e., ``non-incidental materials and 
supplies'').\640\
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    \636\Sec. 471(a) and Treas. Reg. sec. 1.471-1.
    \637\Treas. Reg. sec. 1.446-1(c)(2).
    \638\Rev. Proc. 2001-10, 2001-1 C.B. 272.
    \639\Rev. Proc. 2002-28, 2002-1 C.B. 815.
    \640\Treas. Reg. sec. 1.162-3(a)(1). A deduction is generally 
permitted for the cost of non-incidental materials and supplies in the 
taxable year in which they are first used or are consumed in the 
taxpayer's operations.
---------------------------------------------------------------------------
      In those circumstances in which a taxpayer is required to 
account for inventory, the taxpayer must maintain inventory 
records to determine the cost of goods sold during the taxable 
period. Cost of goods sold generally is determined by adding 
the taxpayer's inventory at the beginning of the period to the 
purchases made during the period and subtracting from that sum 
the taxpayer's inventory at the end of the period.
      Because of the difficulty of accounting for inventory on 
an item-by-item basis, taxpayers often use conventions that 
assume certain item or cost flows. Among these conventions are 
the first-in, first-out (``FIFO'') method, which assumes that 
the items in ending inventory are those most recently acquired 
by the taxpayer, and the last-in, first-out (``LIFO'') method, 
which assumes that the items in ending inventory are those 
earliest acquired by the taxpayer.
Uniform capitalization
      The uniform capitalization rules require certain direct 
and indirect costs allocable to real or tangible personal 
property produced by the taxpayer to be included in either 
inventory or capitalized into the basis of such property, as 
applicable.\641\ For real or personal property acquired by the 
taxpayer for resale, section 263A generally requires certain 
direct and indirect costs allocable to such property to be 
included in inventory.
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    \641\Sec. 263A.
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      Section 263A provides a number of exceptions to the 
general uniform capitalization requirements. One such exception 
exists for certain small taxpayers who acquire property for 
resale and have $10 million or less of average annual gross 
receipts;\642\ such taxpayers are not required to include 
additional section 263A costs in inventory. Another exception 
exists for taxpayers who raise, harvest, or grow trees.\643\ 
Under this exception, section 263A does not apply to trees 
raised, harvested, or grown by the taxpayer (other than trees 
bearing fruit, nuts, or other crops, or ornamental trees) and 
any real property underlying such trees. Similarly, the uniform 
capitalization rules do not apply to any plant having a 
preproductive period of two years or less or to any animal, 
which is produced by a taxpayer in a farming business (unless 
the taxpayer is required to use an accrual method of accounting 
under section 447 or 448(a)(3)).\644\ Freelance authors, 
photographers, and artists also are exempt from section 263A 
for any qualified creative expenses.\645\
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    \642\Sec. 263A(b)(2)(B). No exception is available for small 
taxpayers who produce property subject to section 263A. However, a de 
minimis rule under Treasury regulations treats producers with total 
indirect costs of $200,000 or less as having no additional indirect 
costs beyond those normally capitalized for financial accounting 
purposes. Treas. Reg. sec. 1.263A-2(b)(3)(iv).
    \643\Sec. 263A(c)(5).
    \644\Sec. 263A(d).
    \645\Sec. 263A(h). Qualified creative expenses are defined as 
amounts paid or incurred by an individual in the trade or business of 
being a writer, photographer, or artist. However, such term does not 
include any expense related to printing, photographic plates, motion 
picture files, video tapes, or similar items.
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Accounting for long-term contracts
      In general, in the case of a long-term contract, the 
taxable income from the contract is determined under the 
percentage-of-completion method.\646\ Under this method, the 
taxpayer must include in gross income for the taxable year an 
amount equal to the product of (1) the gross contract price and 
(2) the percentage of the contract completed during the taxable 
year.\647\ The percentage of the contract completed during the 
taxable year is determined by comparing costs allocated to the 
contract and incurred before the end of the taxable year with 
the estimated total contract costs.\648\ Costs allocated to the 
contract typically include all costs (including depreciation) 
that directly benefit or are incurred by reason of the 
taxpayer's long-term contract activities.\649\ The allocation 
of costs to a contract is made in accordance with 
regulations.\650\ Costs incurred with respect to the long-term 
contract are deductible in the year incurred, subject to 
general accrual method of accounting principles and 
limitations.\651\
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    \646\Sec. 460(a).
    \647\See Treas. Reg. sec. 1.460-4. This calculation is done on a 
cumulative basis. Thus, the amount included in gross income in a 
particular year is that proportion of the expected contract price that 
the amount of costs incurred through the end of the taxable year bears 
to the total expected costs, reduced by the amounts of gross contract 
price included in gross income in previous taxable years.
    \648\Sec. 460(b)(1).
    \649\Sec. 460(c).
    \650\Treas. Reg. sec. 1.460-5.
    \651\Treas. Reg. secs. 1.460-4(b)(2)(iv) and 1.460-1(b)(8).
---------------------------------------------------------------------------
      An exception from the requirement to use the percentage-
of-completion method is provided for certain construction 
contracts (``small construction contracts''). Contracts within 
this exception are those contracts for the construction or 
improvement of real property if the contract: (1) is expected 
(at the time such contract is entered into) to be completed 
within two years of commencement of the contract and (2) is 
performed by a taxpayer whose average annual gross receipts for 
the prior three taxable years do not exceed $10 million.\652\ 
Thus, long-term contract income from small construction 
contracts must be reported consistently using the taxpayer's 
exempt contract method.\653\ Permissible exempt contract 
methods include the completed contract method, the exempt-
contract percentage-of-completion method, the percentage-of-
completion method, or any other permissible method.\654\
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    \652\Secs. 460(e)(1)(B) and (4).
    \653\Since such contracts involve the construction of real 
property, they are subject to the interest capitalization rules without 
regard to their duration. See Treas. Reg. sec. 1.263A-8.
    \654\Treas. Reg. sec. 1.460-4(c)(1).
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                               HOUSE BILL

      The provision expands the universe of taxpayers that may 
use the cash method of accounting. Under the provision, the 
cash method of accounting may be used by taxpayers, other than 
tax shelters, that satisfy the gross receipts test, regardless 
of whether the purchase, production, or sale of merchandise is 
an income-producing factor. The gross receipts test allows 
taxpayers with annual average gross receipts that do not exceed 
$25 million for the three prior taxable-year period (the ``$25 
million gross receipts test'') to use the cash method. The $25 
million amount is indexed for inflation for taxable years 
beginning after 2018.
      The provision expands the universe of farming C 
corporations (and farming partnerships with a C corporation 
partner) that may use the cash method to include any farming C 
corporation (or farming partnership with a C corporation 
partner) that meets the $25 million gross receipts test.
      The provision retains the exceptions from the required 
use of the accrual method for qualified personal service 
corporations and taxpayers other than C corporations. Thus, 
qualified personal service corporations, partnerships without C 
corporation partners, S corporations, and other passthrough 
entities are allowed to use the cash method without regard to 
whether they meet the $25 million gross receipts test, so long 
as the use of such method clearly reflects income.\655\
---------------------------------------------------------------------------
    \655\Consistent with present law, the cash method generally may not 
be used by taxpayers, other than those that meet the $25 million gross 
receipts test, if the purchase, production, or sale of merchandise is 
an income-producing factor. In addition, the cash method may not be 
used by a tax shelter.
---------------------------------------------------------------------------
      In addition, the provision also exempts certain taxpayers 
from the requirement to keep inventories. Specifically, 
taxpayers that meet the $25 million gross receipts test are not 
required to account for inventories under section 471\656\, but 
rather may use a method of accounting for inventories that 
either (1) treats inventories as non-incidental materials and 
supplies\657\, or (2) conforms to the taxpayer's financial 
accounting treatment of inventories.\658\
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    \656\In the case of a sole proprietorship, the $25 million gross 
receipts test is applied as if the sole proprietorship is a corporation 
or partnership.
    \657\Consistent with present law, a deduction is generally 
permitted for the cost of non-incidental materials and supplies in the 
taxable year in which they are first used or are consumed in the 
taxpayer's operations. See Treas. Reg. sec. 1.162-3(a)(1).
    \658\The taxpayer's financial accounting treatment of inventories 
is determined by reference to the method of accounting used in the 
taxpayer's applicable financial statement (as defined in section 3202 
of the House bill (Small business accounting method reform and 
simplification)) or, if the taxpayer does not have an applicable 
financial statement, the method of accounting used in the taxpayer's 
book and records prepared in accordance with the taxpayer's accounting 
procedures.
---------------------------------------------------------------------------
      The provision expands the exception for small taxpayers 
from the uniform capitalization rules. Under the provision, any 
producer or reseller that meets the $25 million gross receipts 
test is exempted from the application of section 263A.\659\ The 
provision retains the exemptions from the uniform 
capitalization rules that are not based on a taxpayer's gross 
receipts.
---------------------------------------------------------------------------
    \659\In the case of a sole proprietorship, the $25 million gross 
receipts test is applied as if the sole proprietorship is a corporation 
or partnership.
---------------------------------------------------------------------------
      Finally, the provision expands the exception for small 
construction contracts from the requirement to use the 
percentage-of-completion method. Under the provision, contracts 
within this exception are those contracts for the construction 
or improvement of real property if the contract: (1) is 
expected (at the time such contract is entered into) to be 
completed within two years of commencement of the contract and 
(2) is performed by a taxpayer that (for the taxable year in 
which the contract was entered into) meets the $25 million 
gross receipts test.\660\
---------------------------------------------------------------------------
    \660\In the case of a sole proprietorship, the $25 million gross 
receipts test is applied as if the sole proprietorship is a corporation 
or partnership.
---------------------------------------------------------------------------
      Under the provision, a taxpayer who fails the $25 million 
gross receipts test would not be eligible for any of the 
aforementioned exceptions (i.e., from the accrual method, from 
keeping inventories, from applying the uniform capitalization 
rules, or from using the percentage-of completion method) for 
such taxable year.
      Application of the provisions to expand the universe of 
taxpayers eligible to use the cash method, exempt certain 
taxpayers from the requirement to keep inventories, and expand 
the exception from the uniform capitalization rules is a change 
in the taxpayer's method of accounting for purposes of section 
481. Application of the exception for small construction 
contracts from the requirement to use the percentage-of-
completion method is applied on a cutoff basis for all 
similarly classified contracts (hence there is no adjustment 
under section 481(a) for contracts entered into before January 
1, 2018).
      Effective date.--The provisions to expand the universe of 
taxpayers eligible to use the cash method, exempt certain 
taxpayers from the requirement to keep inventories, and expand 
the exception from the uniform capitalization rules apply to 
taxable years beginning after December 31, 2017. The provision 
to expand the exception for small construction contracts from 
the requirement to use the percentage-of-completion method 
applies to contracts entered into after December 31, 2017, in 
taxable years ending after such date.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill with 
the following modifications. The Senate amendment modifies the 
$25 million gross receipts test to be a $15 million gross 
receipts test which is met if a taxpayer's annual average gross 
receipts do not exceed $15 million for the three prior taxable-
year period. The Senate amendment retains the present law $25 
million gross receipts limit for family farming corporations 
and applies such limit consistent with present law.
      Effective date.--The provisions to expand the universe of 
taxpayers eligible to use the cash method, exempt certain 
taxpayers from the requirement to keep inventories, and expand 
the exception from the uniform capitalization rules apply to 
taxable years beginning after December 31, 2017. The provision 
to expand the exception for small construction contracts from 
the requirement to use the percentage-of-completion method 
applies to contracts entered into after December 31, 2017, in 
taxable years ending after such date.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.

    3. Modification of treatment of S corporation conversions to C 
  corporations (sec. 3204 of the House bill, sec. 13543 of the Senate 
             amendment, and secs. 481 and 1371 of the Code)

                              PRESENT LAW

Changes in accounting method
            Cash and accrual methods in general
      Taxpayers using the cash method generally recognize items 
of income when actually or constructively received and items of 
expense when paid. The cash method is administratively easy and 
provides the taxpayer flexibility in the timing of income 
recognition. It is the method generally used by most individual 
taxpayers, including farm and nonfarm sole proprietorships.
      Taxpayers using an accrual method generally accrue items 
of income when all the events have occurred that fix the right 
to receive the income and the amount of the income can be 
determined with reasonable accuracy.\661\ Taxpayers using an 
accrual method of accounting generally may not deduct items of 
expense prior to when all events have occurred that fix the 
obligation to pay the liability, the amount of the liability 
can be determined with reasonable accuracy, and economic 
performance has occurred.\662\ Accrual methods of accounting 
generally result in a more accurate measure of economic income 
than does the cash method. The accrual method is often used by 
businesses for financial accounting purposes.
---------------------------------------------------------------------------
    \661\See, e.g., sec. 451.
    \662\See, e.g., sec. 461.
---------------------------------------------------------------------------
      A C corporation, a partnership that has a C corporation 
as a partner, or a tax-exempt trust or corporation with 
unrelated business income generally may not use the cash 
method. Exceptions are made for farming businesses,\663\ 
qualified personal service corporations,\664\ and the 
aforementioned entities to the extent their average annual 
gross receipts do not exceed $5 million for all prior years 
(including the prior taxable years of any predecessor of the 
entity) (the ``gross receipts test'').\665\ The cash method may 
not be used by any tax shelter.\666\ In addition, the cash 
method generally may not be used if the purchase, production, 
or sale of merchandise is an income producing factor.\667\ Such 
taxpayers generally are required to keep inventories and use an 
accrual method with respect to inventory items.\668\
---------------------------------------------------------------------------
    \663\A farming business is defined as a trade or business of 
farming, including operating a nursery or sod farm, or the raising or 
harvesting of trees bearing fruit, nuts, or other crops, timber, or 
ornamental trees. Sec. 448(d)(1).
    \664\A qualified personal service corporation is a corporation (1) 
substantially all of whose activities involve the performance of 
services in the fields of health, law, engineering, architecture, 
accounting, actuarial science, performing arts, or consulting, and (2) 
substantially all of the stock of which is owned by current or former 
employees performing such services, their estates, or heirs. Sec. 
448(d)(2).
    \665\The gross receipts test is modified to apply to taxpayers with 
annual average gross receipts that do not exceed $25 million for the 
three prior taxable-year period as part of this bill. See section 3202 
of the bill (Small business accounting method reform and 
simplification).
    \666\Secs. 448(a)(3) and (d)(3) and 461(i)(3) and (4). For this 
purpose, a tax shelter includes: (1) any enterprise (other than a C 
corporation) if at any time interests in such enterprise have been 
offered for sale in any offering required to be registered with any 
Federal or State agency having the authority to regulate the offering 
of securities for sale; (2) any syndicate (within the meaning of 
section 1256(e)(3)(B)); or (3) any tax shelter as defined in section 
6662(d)(2)(C)(ii). In the case of a farming trade or business, a tax 
shelter includes any tax shelter as defined in section 
6662(d)(2)(C)(ii) or any partnership or any other enterprise other than 
a corporation which is not an S corporation engaged in the trade or 
business of farming, (1) if at any time interests in such partnership 
or enterprise have been offered for sale in any offering required to be 
registered with any Federal or State agency having authority to 
regulate the offering of securities for sale or (2) if more than 35 
percent of the losses during any period are allocable to limited 
partners or limited entrepreneurs.
    \667\Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
    \668\Sec. 471 and Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1. 
However, section 3202 of the House bill (Small business accounting 
method reform and simplification) provides an exemption from the 
requirement to use inventories for taxpayers that meet the $25 million 
gross receipts test provided in such section. Accordingly, under the 
bill, such taxpayers are thus also eligible to use the cash method.
---------------------------------------------------------------------------
            Procedures for changing a method of accounting
      A taxpayer filing its first return may adopt any 
permissible method of accounting in computing taxable income 
for such year.\669\ Except as otherwise provided, section 
446(e) requires taxpayers to secure consent of the Secretary 
before changing a method of accounting. The regulations under 
this section provide rules for determining: (1) what a method 
of accounting is, (2) how an adoption of a method of accounting 
occurs, and (3) how a change in method of accounting is 
effectuated.\670\
---------------------------------------------------------------------------
    \669\Treas. Reg. sec. 1.446-1(e)(1).
    \670\Treas. Reg. sec. 1.446-1(e).
---------------------------------------------------------------------------
      Section 481 prescribes the rules to be followed in 
computing taxable income in cases where the taxable income of 
the taxpayer is computed under a different method than the 
prior year (e.g., when changing from the cash method to an 
accrual method). In computing taxable income for the year of 
change, the taxpayer must take into account those adjustments 
which are determined to be necessary solely by reason of such 
change in order to prevent items of income or expense from 
being duplicated or omitted.\671\ The year of change is the 
taxable year for which the taxable income of the taxpayer is 
computed under a different method than the prior year.\672\ 
Congress has provided the Secretary with the authority to 
prescribe the timing and manner in which such adjustments are 
taken into account in computing taxable income.\673\ Net 
adjustments that decrease taxable income generally are taken 
into account entirely in the year of change, and net 
adjustments that increase taxable income generally are taken 
into account ratably during the four-taxable-year period 
beginning with the year of change.\674\
---------------------------------------------------------------------------
    \671\Sec. 481(a)(2) and Treas. Reg. sec. 1.481-1(a)(1).
    \672\Treas. Reg. sec. 1.481-1(a)(1).
    \673\Sec. 481(c). While Treasury regulations generally provide that 
the entire adjustments required by section 481(a) are taken into 
account entirely in the year of change, the Secretary has provided the 
Commissioner with the authority to provide additional guidance 
regarding the taxable year or years in which the adjustments are taken 
into account. See Treas. Reg. sec. 1.481-1(c)(2).
    \674\See Section 7.03 of Rev. Proc. 2015-13, 2015-5 I.R.B 419.
---------------------------------------------------------------------------
Post-termination distributions
      Under present law, in the case of an S corporation that 
converts to a C corporation, distributions of cash by the C 
corporation to its shareholders during the post-termination 
transition period (to the extent of the amount in the 
accumulated adjustment account) are tax-free to the 
shareholders and reduce the adjusted basis of the stock.\675\ 
The post-termination transition period is generally the one-
year period after the S corporation election terminates.\676\
---------------------------------------------------------------------------
    \675\Sec. 1371(e)(1).
    \676\Sec. 1377(b).
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the provision, any section 481(a) adjustment of an 
eligible terminated S corporation attributable to the 
revocation of its S corporation election (i.e., a change from 
the cash method to an accrual method) is taken into account 
ratably during the six-taxable-year period beginning with the 
year of change.\677\ An eligible terminated S corporation is 
any C corporation which (1) is an S corporation the day before 
the enactment of this bill, (2) during the two-year period 
beginning on the date of such enactment revokes its S 
corporation election under section 1362(a), and (3) all of the 
owners of which on the date the S corporation election is 
revoked are the same owners (and in identical proportions) as 
the owners on the date of such enactment.
---------------------------------------------------------------------------
    \677\Section 3202 of the House bill (Small business accounting 
method reform and simplification) expand the universe of partnerships 
and C corporations eligible to use the cash method to include 
partnerships or C corporations with annual average gross receipts that 
do not exceed $25 million for the three prior taxable-year period. 
Accordingly, an eligible terminated S corporation with annual average 
gross receipts that do not exceed $25 million that used the cash method 
prior to revoking its S corporation election may be eligible to remain 
on the cash method as a C corporation.
---------------------------------------------------------------------------
      Under the provision, in the case of a distribution of 
money by an eligible terminated S corporation, the accumulated 
adjustments account shall be allocated to such distribution, 
and the distribution shall be chargeable to accumulated 
earnings and profits, in the same ratio as the amount of the 
accumulated adjustments account bears to the amount the 
accumulated earnings and profits.
      Effective date.--The provision is effective upon 
enactment.

                            SENATE AMENDMENT

      The Senate amendment generally is the same as the House 
bill, except that any increase in tax due to the section 481(a) 
adjustment, rather than the section 481(a) adjustment itself, 
is taken into account ratably during the six-taxable-year 
period beginning with the year of change.
      Effective date.--The provision is effective for 
distributions after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.

       D. Reform of Business Related Exclusions, Deductions, etc.

  1. Interest (secs. 3203 and 3301 of the House bill, secs. 13301 and 
      13311 of the Senate amendment, and sec. 163(j) of the Code)

                              PRESENT LAW

Interest deduction
      Interest paid or accrued by a business generally is 
deductible in the computation of taxable income subject to a 
number of limitations.\678\
---------------------------------------------------------------------------
    \678\Sec. 163(a). In addition to the limitations discussed herein, 
other limitations include: denial of the deduction for the disqualified 
portion of the original issue discount on an applicable high yield 
discount obligation (sec. 163(e)(5)), denial of deduction for interest 
on certain obligations not in registered form (sec. 163(f)), reduction 
of the deduction for interest on indebtedness with respect to which a 
mortgage credit certificate has been issued under section 25 (sec. 
163(g)), disallowance of deduction for personal interest (sec. 163(h)), 
disallowance of deduction for interest on debt with respect to certain 
life insurance contracts (sec. 264), and disallowance of deduction for 
interest relating to tax-exempt income (sec. 265). Interest may also be 
subject to capitalization. See, e.g., sections 263A(f) and 461(g).
---------------------------------------------------------------------------
      Interest is generally deducted by a taxpayer as it is 
paid or accrued, depending on the taxpayer's method of 
accounting. For all taxpayers, if an obligation is issued with 
original issue discount (``OID''), a deduction for interest is 
allowable over the life of the obligation on a yield to 
maturity basis.\679\ Generally, OID arises where interest on a 
debt instrument is not calculated based on a qualified rate and 
required to be paid at least annually.
---------------------------------------------------------------------------
    \679\Sec. 163(e). But see section 267 (dealing in part with 
interest paid to a related or foreign party).
---------------------------------------------------------------------------
Investment interest expense
      In the case of a taxpayer other than a corporation, the 
deduction for interest on indebtedness that is allocable to 
property held for investment (``investment interest'') is 
limited to the taxpayer's net investment income for the taxable 
year.\680\ Disallowed investment interest is carried forward to 
the next taxable year.
---------------------------------------------------------------------------
    \680\Sec. 163(d).
---------------------------------------------------------------------------
      Net investment income is investment income net of 
investment expenses. Investment income generally consists of 
gross income from property held for investment, and investment 
expense includes all deductions directly connected with the 
production of investment income (e.g., deductions for 
investment management fees) other than deductions for interest.
      The two-percent floor on miscellaneous itemized 
deductions allows taxpayers to deduct investment expenses 
connected with investment income only to the extent such 
deductions exceed two percent of the taxpayer's adjusted gross 
income (``AGI'').\681\ Miscellaneous itemized deductions\682\ 
that are not investment expenses are disallowed first before 
any investment expenses are disallowed.\683\
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    \681\Sec. 67(a).
    \682\Miscellaneous itemized deductions include itemized deductions 
of individuals other than certain specific itemized deductions. Sec. 
67(b). Miscellaneous itemized deductions generally include, for 
example, investment management fees and certain employee business 
expenses, but specifically do not include, for example, interest, 
taxes, casualty and theft losses, charitable contributions, medical 
expenses, or other listed itemized deductions.
    \683\H.R. Rep. No. 841, 99th Cong., 2d Sess., p. II-154, Sept. 18, 
1986 (Conf. Rep.) (``In computing the amount of expenses that exceed 
the 2-percent floor, expenses that are not investment expenses are 
intended to be disallowed before any investment expenses are 
disallowed.'').
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Earnings stripping
      Section 163(j) may disallow a deduction for disqualified 
interest paid or accrued by a corporation in a taxable year if 
two threshold tests are satisfied: the payor's debt-to-equity 
ratio exceeds 1.5 to 1.0 (the safe harbor ratio) and the 
payor's net interest expense exceeds 50 percent of its adjusted 
taxable income (generally, taxable income computed without 
regard to deductions for net interest expense, net operating 
losses, domestic production activities under section 199, 
depreciation, amortization, and depletion). Disqualified 
interest includes interest paid or accrued to: (1) related 
parties when no Federal income tax is imposed with respect to 
such interest;\684\ (2) unrelated parties in certain instances 
in which a related party guarantees the debt; or (3) to a real 
estate investment trust (``REIT'') by a taxable REIT subsidiary 
of that trust.\685\ Interest amounts disallowed under these 
rules can be carried forward indefinitely.\686\ In addition, 
any excess limitation (i.e., the excess, if any, of 50 percent 
of the adjusted taxable income of the payor over the payor's 
net interest expense) can be carried forward three years.\687\
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    \684\If a tax treaty reduces the rate of tax on interest paid or 
accrued by the taxpayer, the interest is treated as interest on which 
no Federal income tax is imposed to the extent of the same proportion 
of such interest as the rate of tax imposed without regard to the 
treaty, reduced by the rate of tax imposed by the treaty, bears to the 
rate of tax imposed without regard to the treaty. Sec. 163(j)(5)(B).
    \685\Sec. 163(j)(3).
    \686\Sec. 163(j)(1)(B).
    \687\Sec. 163(j)(2)(B)(ii).
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                               HOUSE BILL

In general
      In the case of any taxpayer for any taxable year, the 
deduction for business interest is limited to the sum of (1) 
business interest income; (2) 30 percent of the adjusted 
taxable income of the taxpayer for the taxable year; and (3) 
the floor plan financing interest of the taxpayer for the 
taxable year. The amount of any business interest not allowed 
as a deduction for any taxable year may be carried forward for 
up to five years beyond the year in which the business interest 
was paid or accrued, treating business interest as allowed as a 
deduction on a first-in, first-out basis. The limitation 
applies at the taxpayer level. In the case of a group of 
affiliated corporations that file a consolidated return, the 
limitation applies at the consolidated tax return filing level.
      Business interest means any interest paid or accrued on 
indebtedness properly allocable to a trade or business. Any 
amount treated as interest for purposes of the Internal Revenue 
Code is interest for purposes of the provision. Business 
interest income means the amount of interest includible in the 
gross income of the taxpayer for the taxable year which is 
properly allocable to a trade or business. Business interest 
does not include investment interest, and business interest 
income does not include investment income, within the meaning 
of section 163(d).\688\
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    \688\Section 163(d) applies in the case of a taxpayer other than a 
corporation. Thus, a corporation has neither investment interest nor 
investment income within the meaning of section 163(d). Thus, interest 
income and interest expense of a corporation is properly allocable to a 
trade or business, unless such trade or business is otherwise 
explicitly excluded from the application of the provision.
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      Adjusted taxable income means the taxable income of the 
taxpayer computed without regard to (1) any item of income, 
gain, deduction, or loss which is not properly allocable to a 
trade or business; (2) any business interest or business 
interest income; (3) the amount of any net operating loss 
deduction; and (4) any deduction allowable for depreciation, 
amortization, or depletion.\689\ The Secretary may provide 
other adjustments to the computation of adjusted taxable 
income.
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    \689\Any deduction allowable for depreciation, amortization, or 
depletion includes any deduction allowable for any amount treated as 
depreciation, amortization, or depletion under present law.
---------------------------------------------------------------------------
      Floor plan financing interest means interest paid or 
accrued on floor plan financing indebtedness. Floor plan 
financing indebtedness means indebtedness used to finance the 
acquisition of motor vehicles held for sale to retail customers 
and secured by the inventory so acquired. A motor vehicle means 
a motor vehicle that is an automobile, a truck, a recreational 
vehicle, a motorcycle, a boat, farm machinery or equipment, or 
construction machinery or equipment.
      By including business interest income and floor plan 
financing interest in the limitation, the rule operates to 
allow floor plan financing interest to be fully deductible and 
to limit the deduction for net interest expense (less floor 
plan financing interest) to 30 percent of adjusted taxable 
income. That is, a deduction for business interest is permitted 
to the full extent of business interest income and any floor 
plan financing interest. To the extent that business interest 
exceeds business interest income and floor plan financing 
interest, the deduction for the net interest expense is limited 
to 30 percent of adjusted taxable income.
      It is generally intended that, similar to present law, 
section 163(j) apply after the application of provisions that 
subject interest to deferral, capitalization, or other 
limitation. Thus, section 163(j) applies to interest deductions 
that are deferred, for example under section 163(e) or section 
267(a)(3)(B), in the taxable year to which such deductions are 
deferred. Section 163(j) applies after section 263A is applied 
to capitalize interest and after, for example, section 265 or 
section 279 is applied to disallow interest.
Application to passthrough entities
            In general
      In the case of any partnership, the limitation is applied 
at the partnership level. Any deduction for business interest 
is taken into account in determining the nonseparately stated 
taxable income or loss of the partnership.\690\ To prevent 
double counting, special rules are provided for the 
determination of the adjusted taxable income of each partner of 
the partnership. Similarly, to allow for additional interest 
deduction by a partner in the case of an excess amount of 
unused adjusted taxable income limitation of the partnership, 
special rules apply. Similar rules apply with respect to any S 
corporation and its shareholders.
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    \690\This amount is the ``Ordinary business income or loss'' 
reflected on Form 1065 (U.S. Return of Partnership Income). The 
partner's distributive share is reflected in Box 1 of Schedule K-1 
(Form 1065).
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            Double counting rule
      The adjusted taxable income of each partner (or 
shareholder, as the case may be) is determined without regard 
to such partner's distributive share of the nonseparately 
stated income or loss of such partnership. In the absence of 
such a rule, the same dollars of adjusted taxable income of a 
partnership could generate additional interest deductions as 
the income is passed through to the partners.
      Example 1.--ABC is a partnership owned 50-50 by XYZ 
Corporation and an individual. ABC generates $200 of 
noninterest income. Its only expense is $60 of business 
interest. Under the provision the deduction for business 
interest is limited to 30 percent of adjusted taxable income, 
that is, 30 percent * $200 = $60. ABC deducts $60 of business 
interest and reports ordinary business income of $140. XYZ's 
distributive share of the ordinary business income of ABC is 
$70. XYZ has net taxable income of zero from its other 
operations, none of which is attributable to interest income 
and without regard to its business interest expense. XYZ has 
business interest expense of $25. In the absence of any special 
rule, the $70 of taxable income from its interest in ABC would 
permit the deduction of up to an additional $21 of interest (30 
percent * $70 = $21), resulting in a deduction disallowance of 
only $4. XYZ's $100 share of ABC's adjusted taxable income 
would generate $51 of interest deductions. If XYZ were instead 
a passthrough entity, additional deductions could be available 
at each tier.
      The double counting rule provides that XYZ has adjusted 
taxable income computed without regard to the $70 distributive 
share of the nonseparately stated income of ABC. As a result, 
XYZ has adjusted taxable income of $0. XYZ's deduction for 
business interest is limited to 30 percent * $0 = $0, resulting 
in a deduction disallowance of $25.
            Additional deduction limit
      The limit on the amount allowed as a deduction for 
business interest is increased by a partner's distributive 
share of the partnership's excess amount of unused adjusted 
taxable income limitation. The excess amount with respect to 
any partnership is the excess (if any) of 30 percent of the 
adjusted taxable income of the partnership over the amount (if 
any) by which the business interest of the partnership (reduced 
by floor plan financing interest) exceeds the business interest 
income of the partnership. This allows a partner of a 
partnership to deduct more interest expense the partner may 
have paid or incurred to the extent the partnership could have 
deducted more business interest.
      Example 2.--The facts are the same as in Example 1 except 
ABC has only $40 of business interest. As in Example 1, ABC has 
a limit on its interest deduction of $60. The excess amount for 
ABC is $60-$40 = $20. XYZ's distributive share of the excess 
amount from ABC partnership is $10. XYZ's deduction for 
business interest is limited to 30 percent of its adjusted 
taxable income plus its distributive share of the excess amount 
from ABC partnership (30 percent * $0 + $10 = $10). As a result 
of the rule, XYZ may deduct $10 of business interest and has an 
interest deduction disallowance of $15.
Carryforward of disallowed business interest
      The amount of any business interest not allowed as a 
deduction for any taxable year is treated as business interest 
paid or accrued in the succeeding taxable year. Business 
interest may be carried forward for up to five years. 
Carryforwards are determined on a first-in, first-out basis. It 
is intended that the provision be administered in a way to 
prevent trafficking in carryforwards.
      A coordination rule is provided with the limitation on 
deduction of interest by domestic corporations in international 
financial reporting groups.\691\ Whichever rule imposes the 
lower limitation on deduction of business interest with respect 
to the taxable year (and therefore the greatest amount of 
interest to be carried forward) governs.
---------------------------------------------------------------------------
    \691\See section 4302 of the bill (Limitation on deduction of 
interest by domestic corporations which are members of an international 
financial reporting group).
---------------------------------------------------------------------------
      Any carryforward of disallowed business interest is an 
item taken into account in the case of certain corporate 
acquisitions described in section 381 and is subject to 
limitation under section 382.
Exceptions
      The limitation does not apply to any taxpayer that meets 
the $25 million gross receipts test of section 448(c), that is, 
if the average annual gross receipts for the three-taxable-year 
period ending with the prior taxable year does not exceed $25 
million.\692\ Aggregation rules apply to determine the amount 
of a taxpayer's gross receipts under the gross receipts test of 
section 448(c).
---------------------------------------------------------------------------
    \692\In the case of a sole proprietorship, the $25 million gross 
receipts test is applied as if the sole proprietorship were a 
corporation or partnership.
---------------------------------------------------------------------------
      The trade or business of performing services as an 
employee is not treated as a trade or business for purposes of 
the limitation. As a result, for example, the wages of an 
employee are not counted in the adjusted taxable income of the 
taxpayer for purposes of determining the limitation.
      The limitation does not apply to a real property trade or 
business as defined in section 469(c)(7)(C). Any real property 
development, redevelopment, construction, reconstruction, 
acquisition, conversion, rental, operation, management, 
leasing, or brokerage trade or business is not treated as a 
trade or business for purposes of the limitation.
      The limitation does not apply to certain regulated public 
utilities. Specifically, the trade or business of the 
furnishing or sale of (1) electrical energy, water, or sewage 
disposal services, (2) gas or steam through a local 
distribution system, or (3) transportation of gas or steam by 
pipeline, if the rates for such furnishing or sale, as the case 
may be, have been established or approved by a State\693\ or 
political subdivision thereof, by any agency or instrumentality 
of the United States, or by a public service or public utility 
commission or other similar body of any State or political 
subdivision thereof is not treated as a trade or business for 
purposes of the limitation. As a result, for example, interest 
expense paid or incurred in a real property trade or business 
is not business interest subject to limitation and is generally 
deductible in the computation of taxable income.
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    \693\The term ``State'' includes the District of Columbia. See sec. 
7701(a)(10) (``The term `State' shall be construed to include the 
District of Columbia where such construction is necessary to carry out 
provisions of this title'').
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      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, with 
the following modifications.
In general
      The Senate amendment makes several changes to the 
definition of adjusted taxable income. Specifically, the Senate 
amendment does not add back deductions allowable for 
depreciation, amortization, or depletion, but does add back any 
deduction under section 199,\694\ and any deduction under 
section 199A with respect to qualified business income of a 
passthrough entity.\695\
---------------------------------------------------------------------------
    \694\The deduction for income attributable to domestic production 
activities is repealed effective for taxable years beginning after 
December 31, 2018. See section 13305 of the Senate amendment (Repeal of 
deduction for income attributable to domestic production activities).
    \695\See section 11011 of the Senate amendment (Deduction for 
qualified business income).
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      The Senate amendment also modifies the definition of 
floor plan financing. Specifically, the Senate amendment 
permits interest on indebtedness used to finance acquisition of 
motor vehicles for sale or lease (i.e., not just for sale, as 
in the House bill) to qualify as floor plan financing interest. 
The Senate amendment also includes self-propelled vehicles in 
the definition of motor vehicle, but removes construction 
machinery and equipment from the definition.
Carryforward of disallowed business interest
      The Senate amendment permits interest deductions to be 
carried forward indefinitely, subject to certain restrictions 
applicable to partnerships, described below.
Application to passthrough entities
      The Senate amendment requires a partner in a partnership 
to ignore the partner's distributive share of all items of 
income, gain, deduction, or loss of the partnership when 
calculating adjusted taxable income (rather than merely 
ignoring the nonseparately stated income or loss, as in the 
House bill).
      The Senate amendment takes a different mathematical 
approach from the House bill to calculating a partner's 
interest limitation, though both provisions have the same 
practical effect. In the Senate amendment, the limit on the 
amount allowed as a deduction for business interest is 
increased by a partner's distributive share of the 
partnership's excess taxable income. The excess taxable income 
with respect to any partnership is the amount which bears the 
same ratio to the partnership's adjusted taxable income as the 
excess (if any) of 30 percent of the adjusted taxable income of 
the partnership over the amount (if any) by which the business 
interest of the partnership, reduced by floor plan financing 
interest, exceeds the business interest income of the 
partnership bears to 30 percent of the adjusted taxable income 
of the partnership. This allows a partner of a partnership to 
deduct additional interest expense the partner may have paid or 
incurred to the extent the partnership could have deducted more 
business interest. The Senate amendment requires that excess 
taxable income be allocated in the same manner as nonseparately 
stated income and loss. As in the House bill, rules similar to 
these rules also apply to S corporations.
      The Senate amendment provides a special rule for 
carryforward of disallowed partnership interest. In the case of 
a partnership, the general carryforward rule described in the 
discussion of the House bill does not apply. Instead, any 
business interest that is not allowed as a deduction to the 
partnership for the taxable year is allocated to each partner 
in the same manner as nonseparately stated taxable income or 
loss of the partnership. The partner may deduct its share of 
the partnership's excess business interest in any future year, 
but only against excess taxable income attributed to the 
partner by the partnership the activities of which gave rise to 
the excess business interest carryforward. Any such deduction 
requires a corresponding reduction in excess taxable income. 
Additionally, when excess business interest is allocated to a 
partner, the partner's basis in its partnership interest is 
reduced (but not below zero) by the amount of such allocation, 
even though the carryforward does not give rise to a partner 
deduction in the year of the basis reduction. However, the 
partner's deduction in a future year for interest carried 
forward does not reduce the partner's basis in the partnership 
interest. In the event the partner disposes of a partnership 
interest the basis of which has been so reduced, the partner's 
basis in such interest shall be increased, immediately before 
such disposition, by the amount that any such basis reductions 
exceed any amount of excess interest expense that has been 
treated as paid by the partner (i.e., excess interest expense 
that has been deducted by the partner against excess taxable 
income of the same partnership). This special rule does not 
apply to S corporations and their shareholders.
Exceptions
      The Senate amendment exempts certain categories of 
taxpayers or trades or businesses from the interest limitation. 
First, any taxpayer that meets the $15 million gross receipts 
test of section 448(c) is exempt from the interest 
limitation.\696\ Second, the Senate amendment expands the 
regulated public utilities exception in the House bill to 
include utilities where the rates for such furnishing or sale, 
as the case may be, have been established by the governing or 
ratemaking body of an electric cooperative.
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    \696\See section 13102 of the Senate amendment (Modifications of 
gross receipts test for use of cash method of accounting by 
corporations and partnerships). In the case of a sole proprietorship, 
the $15 million gross receipts test is applied as if the sole 
proprietorship were a corporation or partnership.
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      In the Senate amendment, at the taxpayer's election, any 
real property development, redevelopment, construction, 
reconstruction, acquisition, conversion, rental, operation, 
management, leasing, or brokerage trade or business is not 
treated as a trade or business for purposes of the limitation, 
and therefore the limitation does not apply to such trades or 
businesses.\697\ Similarly, at the taxpayer's election, any 
farming business,\698\ as well as any business engaged in the 
trade or business of a specified agricultural or horticultural 
cooperative,\699\ are not treated as trades or businesses for 
purposes of the limitation, and therefore the limitation does 
not apply to such trades or businesses.
---------------------------------------------------------------------------
    \697\It is intended that any such real property trade or business, 
including such a trade or business conducted by a corporation or real 
estate investment trust, be included. Because this description of a 
real property trade or business refers only to the section 469(c)(7)(C) 
description, and not to other rules of section 469 (such as the rule of 
section 469(c)(2) that passive activities include rental activities or 
the rule of section 469(a) that a passive activity loss is limited 
under section 469), the other rules of section 469 are not made 
applicable by this reference. It is further intended that a real 
property operation or a real property management trade or business 
includes the operation or management of a lodging facility.
    \698\As defined in section 263A(e)(4) (i.e., farming business means 
the trade or business of farming and includes the trade or business of 
operating a nursery or sod farm, or the raising or harvesting of trees 
bearing fruit, nuts, or other crops, or ornamental trees (other than 
evergreen trees that are more than six years old at the time they are 
severed from their roots)). Treas. Reg. sec. 1.263A-4(a)(4) further 
defines a farming business as a trade or business involving the 
cultivation of land or the raising or harvesting of any agricultural or 
horticultural commodity. Examples of a farming business include the 
trade or business of operating a nursery or sod farm; the raising or 
harvesting of trees bearing fruit, nuts, or other crops; the raising of 
ornamental trees (other than evergreen trees that are more than six 
years old at the time they are severed from their roots); and the 
raising, shearing, feeding, caring for, training, and management of 
animals. A farming business also includes processing activities that 
are normally incident to the growing, raising, or harvesting of 
agricultural or horticultural products. See Treas. Reg. sec. 1.263A-
4(a)(4)(i) and (ii). A farming business does not include contract 
harvesting of an agricultural or horticultural commodity grown or 
raised by another taxpayer, or merely buying and reselling plants or 
animals grown or raised by another taxpayer. See Treas. Reg. sec. 
1.263A-4(a)(4)(i).
    \699\As defined in new section 199A(g)(2) under the Senate 
amendment. See section 11011 of the Senate amendment (Deduction for 
qualified business income).
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                          CONFERENCE AGREEMENT

      The conference agreement generally follows the Senate 
amendment, with the following modifications. Under the 
conference agreement, for taxable years beginning after 
December 31, 2017 and before January 1, 2022, adjusted taxable 
income is computed without regard to deductions allowable for 
depreciation, amortization, or depletion. Additionally, because 
the conference agreement repeals section 199 effective December 
31, 2017, adjusted taxable income is computed without regard to 
such deduction. The conference agreement follows the House in 
exempting from the limitation taxpayers with average annual 
gross receipts for the three-taxable-year period ending with 
the prior taxable year that do not exceed $25 million. In 
addition, for purposes of defining floor plan financing, the 
conference agreement modifies the definition of motor vehicle 
by deleting the specific references to an automobile, a truck, 
a recreational vehicle, and a motorcycle because those terms 
are encompassed in the phrase, ``any self-propelled vehicle 
designed for transporting persons or property on a public 
street, highway, or road,'' which was also part of the 
definition in the Senate amendment.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.
2. Modification of net operating loss deduction (sec. 3302 of the House 
        bill, sec. 13302 of the Senate amendment, and sec. 172 of the 
        Code)

                              PRESENT LAW

      A net operating loss (``NOL'') generally means the amount 
by which a taxpayer's business deductions exceed its gross 
income.\700\ In general, an NOL may be carried back two years 
and carried over 20 years to offset taxable income in such 
years.\701\ NOLs offset taxable income in the order of the 
taxable years to which the NOL may be carried.\702\
---------------------------------------------------------------------------
    \700\Sec. 172(c).
    \701\Sec. 172(b)(1)(A).
    \702\Sec. 172(b)(2).
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      Different carryback periods apply with respect to NOLs 
arising in different circumstances. Extended carryback periods 
are allowed for NOLs attributable to specified liability losses 
and certain casualty and disaster losses.\703\ Limitations are 
placed on the carryback of excess interest losses attributable 
to corporate equity reduction transactions.\704\
---------------------------------------------------------------------------
    \703\Sec. 172(b)(1)(C) and (E).
    \704\Sec. 172(b)(1)(D).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision limits the NOL deduction to 90 percent of 
taxable income (determined without regard to the deduction). 
Carryovers to other years are adjusted to take account of this 
limitation, and may be carried forward indefinitely. In 
addition, NOL carryovers attributable to losses arising in 
taxable years beginning after December 31, 2017, are increased 
annually to take into account the time value of money.
      The provision repeals the two-year carryback and the 
special carryback provisions, but provides a one-year carryback 
in the case of certain disaster losses incurred in the trade or 
business of farming, or by certain small businesses.\705\ For 
this purpose, small business means a corporation, partnership, 
or sole proprietorship whose average annual gross receipts for 
the three-taxable-year period ending with such taxable year 
does not exceed $5,000,000. Aggregation rules apply to 
determine gross receipts.
---------------------------------------------------------------------------
    \705\Notwithstanding the amendments made by the provision and 
section 1304 of the House bill (Repeal of deduction for personal 
casualty losses), the provision retains the present-law three-year 
carryback for the portion of the NOL for any taxable year which is a 
net disaster loss to which section 504(b) of the Disaster Tax Relief 
and Airport and Airway Extension Act of 2017 (Pub. L. No. 115-63) 
applies (i.e., a net disaster loss arising from hurricane Harvey, Irma, 
or Maria).
---------------------------------------------------------------------------
      Effective date.--The provision allowing indefinite 
carryovers and modifying carrybacks generally applies to losses 
arising in taxable years beginning after December 31, 
2017.\706\
---------------------------------------------------------------------------
    \706\See section 3101 of the House bill (Increased expensing) for a 
limitation on the amount of any NOL which may be treated as an NOL 
carryback in the case of any year which includes any portion of the 
period beginning September 28, 2017 and ending December 31, 2017.
---------------------------------------------------------------------------
      The provision limiting the NOL deduction applies to 
taxable years beginning after December 31, 2017.
      The annual increase in carryover amounts applies to 
taxable years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill, with the 
following modifications. First, provision limits the NOL 
deduction to 80 percent of taxable income (determined without 
regard to the deduction), for losses arising in taxable years 
beginning after December 31, 2022. The limitation does not 
apply to a property and casualty insurance company.
      The provision repeals the two-year carryback and the 
special carryback provisions, but provides a two-year carryback 
in the case of certain losses incurred in the trade or business 
of farming. In addition, the Senate amendment provides a two-
year carryback and 20-year carryforward for NOLs of a property 
and casualty insurance company (defined in section 816(a)) as 
an insurance company other than a life insurance company).
      The provision does not increase NOL carryovers.
      Effective date.--The provision allowing indefinite 
carryovers and modifying carrybacks applies to losses arising 
in taxable years beginning after December 31, 2017.
      The provision limiting the NOL deduction applies to 
losses arising in taxable years beginning after December 31, 
2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
except that the provision limits the NOL deduction to 80 
percent of taxable income (determined without regard to the 
deduction) for losses arising in taxable years beginning after 
December 31, 2017.
3. Like-kind exchanges of real property (sec. 3303 of the House bill, 
        and sec. 13303 of the Senate amendment, and sec. 1031 of the 
        Code)

                              PRESENT LAW

      An exchange of property, like a sale, generally is a 
taxable event. However, no gain or loss is recognized if 
property held for productive use in a trade or business or for 
investment is exchanged for property of a ``like kind'' which 
is to be held for productive use in a trade or business or for 
investment.\707\ In general, section 1031 does not apply to any 
exchange of stock in trade (i.e., inventory) or other property 
held primarily for sale; stocks, bonds, or notes; other 
securities or evidences of indebtedness or interest; interests 
in a partnership; certificates of trust or beneficial 
interests; or choses in action.\708\ Section 1031 also does not 
apply to certain exchanges involving livestock\709\ or foreign 
property.\710\
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    \707\Sec. 1031(a)(1).
    \708\Sec. 1031(a)(2). A chose in action is a right that can be 
enforced by legal action.
    \709\Sec. 1031(e).
    \710\Sec. 1031(h).
---------------------------------------------------------------------------
      For purposes of section 1031, the determination of 
whether property is of a ``like kind'' relates to the nature or 
character of the property and not its grade or quality, i.e., 
the nonrecognition rules do not apply to an exchange of one 
class or kind of property for property of a different class or 
kind (e.g., section 1031 does not apply to an exchange of real 
property for personal property).\711\ The different classes of 
property are: (1) depreciable tangible personal property;\712\ 
(2) intangible or nondepreciable personal property;\713\ and 
(3) real property.\714\ However, the rules with respect to 
whether real estate is ``like kind'' are applied more liberally 
than the rules governing like-kind exchanges of depreciable, 
intangible, or nondepreciable personal property. For example, 
improved real estate and unimproved real estate generally are 
considered to be property of a ``like kind'' as this 
distinction relates to the grade or quality of the real 
estate,\715\ while depreciable tangible personal properties 
must be either within the same General Asset Class\716\ or 
within the same Product Class.\717\
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    \711\Treas. Reg. sec. 1.1031(a)-1(b).
    \712\For example, an exchange of a personal computer classified 
under asset class 00.12 of Rev. Proc. 87-56, 1987-2 C.B. 674, for a 
printer classified under the same asset class of Rev. Proc. 87-56 would 
be treated as property of a like kind. However, an exchange of an 
airplane classified under asset class 00.21 of Rev. Proc. 87-56 for a 
heavy general purpose truck classified under asset class 00.242 of Rev. 
Proc. 87-56 would not be treated as property of a like kind. See Treas. 
Reg. sec. 1.1031(a)-2(b)(7).
    \713\For example, an exchange of a copyright on a novel for a 
copyright on a different novel would be treated as property of a like 
kind. See Treas. Reg. sec. 1.1031(a)-2(c)(3). However, the goodwill or 
going concern value of one business is not of a like kind to the 
goodwill or going concern value of a different business. See Treas. 
Reg. sec. 1.1031(a)-2(c)(2). The Internal Revenue Service (``IRS'') has 
ruled that intangible assets such as trademarks, trade names, 
mastheads, and customer-based intangibles that can be separately 
described and valued apart from goodwill qualify as property of a like 
kind under section 1031. See Chief Counsel Advice 200911006, February 
12, 2009.
    \714\Treas. Reg. sec. 1.1031(a)-1(b) and (c).
    \715\Treas. Reg. sec. 1.1031(a)-1(b).
    \716\Treasury Regulation section 1.1031(a)-2(b)(2) provides the 
following list of General Asset Classes, based on asset classes 00.11 
through 00.28 and 00.4 of Rev. Proc. 87-56, 1987-2 C.B. 674: (i) Office 
furniture, fixtures, and equipment (asset class 00.11), (ii) 
Information systems (computers and peripheral equipment) (asset class 
00.12), (iii) Data handling equipment, except computers (asset class 
00.13), (iv) Airplanes (airframes and engines), except those used in 
commercial or contract carrying of passengers or freight, and all 
helicopters (airframes and engines) (asset class 00.21), (v) 
Automobiles, taxis (asset class 00.22), (vi) Buses (asset class 00.23), 
(vii) Light general purpose trucks (asset class 00.241), (viii) Heavy 
general purpose trucks (asset class 00.242), (ix) Railroad cars and 
locomotives, except those owned by railroad transportation companies 
(asset class 00.25), (x) Tractor units for use over-the-road (asset 
class 00.26), (xi) Trailers and trailer-mounted containers (asset class 
00.27), (xii) Vessels, barges, tugs, and similar water-transportation 
equipment, except those used in marine construction (asset class 
00.28), and (xiii) Industrial steam and electric generation and/or 
distribution systems (asset class 00.4).
    \717\Property within a product class consists of depreciable 
tangible personal property that is described in a 6-digit product class 
within Sectors 31, 32, and 33 (pertaining to manufacturing industries) 
of the North American Industry Classification System (``NAICS''), set 
forth in Executive Office of the President, Office of Management and 
Budget, North American Industry Classification System, United States, 
2002 (NAICS Manual), as periodically updated. Treas. Reg. sec. 
1.1031(a)-2(b)(3).
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      The nonrecognition of gain in a like-kind exchange 
applies only to the extent that like-kind property is received 
in the exchange. Thus, if an exchange of property would meet 
the requirements of section 1031, but for the fact that the 
property received in the transaction consists not only of the 
property that would be permitted to be exchanged on a tax-free 
basis, but also other non-qualifying property or money 
(``additional consideration''), then the gain to the recipient 
of the other property or money is required to be recognized, 
but not in an amount exceeding the fair market value of such 
other property or money.\718\ Additionally, any such gain 
realized on a section 1031 exchange as a result of additional 
consideration being involved constitutes ordinary income to the 
extent that the gain is subject to the recapture provisions of 
sections 1245 and 1250.\719\ No losses may be recognized from a 
like-kind exchange.\720\
---------------------------------------------------------------------------
    \718\Sec. 1031(b). For example, if a taxpayer holding land A having 
a basis of $40,000 and a fair market value of $100,000 exchanges the 
property for land B worth $90,000 plus $10,000 in cash, the taxpayer 
would recognize $10,000 of gain on the transaction, which would be 
includable in income. The remaining $50,000 of gain would be deferred 
until the taxpayer disposes of land B in a taxable sale or exchange.
    \719\Secs. 1245(b)(4) and 1250(d)(4). For example, if a taxpayer 
holding section 1245 property A with an original cost basis of $11,000, 
an adjusted basis of $10,000, and a fair market value of $15,000 
exchanges the property for section 1245 property B with a fair market 
value of $14,000 plus $1,000 in cash, the taxpayer would recognize 
$1,000 of ordinary income on the transaction. The remaining $4,000 of 
gain would be deferred until the taxpayer disposes of section 1245 
property B in a taxable sale or exchange.
    \720\Sec. 1031(c).
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      If section 1031 applies to an exchange of properties, the 
basis of the property received in the exchange is equal to the 
basis of the property transferred. This basis is increased to 
the extent of any gain recognized as a result of the receipt of 
other property or money in the like-kind exchange, and 
decreased to the extent of any money received by the 
taxpayer.\721\ The holding period of qualifying property 
received includes the holding period of the qualifying property 
transferred, but the nonqualifying property received is 
required to begin a new holding period.\722\
---------------------------------------------------------------------------
    \721\Sec. 1031(d). Thus, in the example noted above, the taxpayer's 
basis in B would be $40,000 (the taxpayer's transferred basis of 
$40,000, increased by $10,000 in gain recognized, and decreased by 
$10,000 in money received).
    \722\Sec. 1223(1).
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      A like-kind exchange also does not require that the 
properties be exchanged simultaneously. Rather, the property to 
be received in the exchange must be received not more than 180 
days after the date on which the taxpayer relinquishes the 
original property (but in no event later than the due date 
(including extensions) of the taxpayer's income tax return for 
the taxable year in which the transfer of the relinquished 
property occurs). In addition, the taxpayer must identify the 
property to be received within 45 days after the date on which 
the taxpayer transfers the property relinquished in the 
exchange.\723\
---------------------------------------------------------------------------
    \723\Sec. 1031(a)(3).
---------------------------------------------------------------------------
      The Treasury Department has issued regulations\724\ and 
revenue procedures\725\ providing guidance and safe harbors for 
taxpayers engaging in deferred like-kind exchanges.
---------------------------------------------------------------------------
    \724\Treas. Reg. sec. 1.1031(k)-1(a) through (o).
    \725\See Rev. Proc. 2000-37, 2000-40 I.R.B. 308, as modified by 
Rev. Proc. 2004-51, 2004-33 I.R.B. 294.
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                               HOUSE BILL

      The provision modifies the provision providing for 
nonrecognition of gain in the case of like-kind exchanges by 
limiting its application to real property that is not held 
primarily for sale.\726\
---------------------------------------------------------------------------
    \726\It is intended that real property eligible for like-kind 
exchange treatment under present law will continue to be eligible for 
like-kind exchange treatment under the provision. For example, a like-
kind exchange of real property includes an exchange of shares in a 
mutual ditch, reservoir, or irrigation company described in section 
501(c)(12)(A) if at the time of the exchange such shares have been 
recognized by the highest court or statute of the State in which the 
company is organized as constituting or representing real property or 
an interest in real property. Similarly, improved real estate and 
unimproved real estate are generally considered to be property of a 
like kind. See Treas. Reg. sec. 1.1031(a)-1(b).
---------------------------------------------------------------------------
      Effective date.--The provision generally applies to 
exchanges completed after December 31, 2017. However, an 
exception is provided for any exchange if the property disposed 
of by the taxpayer in the exchange is disposed of on or before 
December 31, 2017, or the property received by the taxpayer in 
the exchange is received on or before such date.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
4. Revision of treatment of contributions to capital (sec. 3304 of the 
        House bill and sec. 118 of the Code)

                              PRESENT LAW

      The gross income of a corporation does not include any 
contribution to its capital.\727\ For purposes of this rule, a 
contribution to the capital of a corporation does not include 
any contribution in aid of construction or any other 
contribution from a customer or potential customer.\728\ A 
special rule allows certain contributions in aid of 
construction received by a regulated public utility that 
provides water or sewerage disposal services to be treated as a 
tax-free contribution to the capital of the utility.\729\ No 
deduction or credit is allowed for, or by reason of, any 
expenditure that constitutes a contribution that is treated as 
a tax-free contribution to the capital of the utility.\730\
---------------------------------------------------------------------------
    \727\Sec. 118(a).
    \728\Sec. 118(b).
    \729\Sec. 118(c)(1).
    \730\Sec. 118(c)(4).
---------------------------------------------------------------------------
      If property is acquired by a corporation as a 
contribution to capital and is not contributed by a shareholder 
as such, the adjusted basis of the property is zero.\731\ If 
the contribution consists of money, the corporation must first 
reduce the basis of any property acquired with the contributed 
money within the following 12-month period, and then reduce the 
basis of other property held by the corporation.\732\ 
Similarly, the adjusted basis of any property acquired by a 
utility with a contribution in aid of construction is 
zero.\733\
---------------------------------------------------------------------------
    \731\Sec. 362(c)(1).
    \732\Sec. 362(c)(2). See also Treas. Reg. sec. 1.362-2.
    \733\Sec. 118(c)(4).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision repeals the provision of the Internal 
Revenue Code under which, generally, a corporation's gross 
income does not include contributions of capital to the 
corporation.
      The provision provides that a contribution to capital, 
other than a contribution of money or property made in exchange 
for stock of a corporation or any interest in an entity, is 
included in gross income of the corporation. For example, a 
contribution of municipal land by a municipality that is not in 
exchange for stock (or for a partnership interest or other 
interest) of equivalent value is considered a contribution to 
capital that is includable in gross income. By contrast, a 
municipal tax abatement for locating a business in a particular 
municipality is not considered a contribution to capital.
      The provision further provides that a contribution of 
capital in exchange for stock is not includible in the gross 
income of the corporation to the extent that the fair market 
value of any money or other property contributed does not 
exceed the fair market value of stock received. It is intended 
that, for this purpose, the fair market value of any property 
contributed is calculated net of any liabilities to which the 
property is subject and net of any liabilities or obligations 
of the transferor assumed or taken subject to by the entity in 
connection with the transaction. When valuing stock or equity 
received, taxpayers may disregard discounts for lack of control 
and the effect of limited liquidity on valuation.
      The provision does not change the application of the 
meaningless gesture doctrine, described in Lessinger v. 
Commissioner, 872 F.2d 519 (2d. Cir. 1989) and related cases, 
as well as in administrative guidance.\734\ Thus, under the 
provision, whether incremental shares of stock are issued when 
the existing shareholder or shareholders of a corporation make 
a pro-rata contribution to the capital of the corporation is 
not determinative of whether the contribution is included in 
income of the corporation.
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    \734\Rev. Rul. 64-155, 1964-1 CB 138.
---------------------------------------------------------------------------
      The fair market value requirement generally will be 
satisfied in any arm's length transaction in which stock is 
issued in consideration for cash. Thus, for example, in a 
public offering, if the price of the stock was determined on an 
arm's length basis, the fact the stock trades immediately after 
its issuance at a price below the issue price will not result 
in contribution to capital treatment.
      Finally, the provision provides rules clarifying the 
contributee's basis in the property contributed.
      Effective date.--The provision applies to contributions 
made, and transactions entered into, after the date of 
enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the policy of the House 
bill but takes a different approach. The conference agreement 
does not repeal the provision of the Internal Revenue Code 
under which, generally, a corporation's gross income does not 
include contributions to capital. Rather, it preserves that 
provision, but provides that the term ``contributions to 
capital'' does not include (1) any contribution in aid of 
construction or any other contribution as a customer or 
potential customer, and (2) any contribution by any 
governmental entity or civic group (other than a contribution 
made by a shareholder as such). The conferees intend that 
section 118, as modified, continue to apply only to 
corporations.
      Effective date.--The provision applies to contributions 
made after the date of enactment. However, the provision shall 
not apply to any contribution made after the date of enactment 
by a governmental entity pursuant to a master development plan 
that has been approved prior to such date by a governmental 
entity.
5. Repeal of deduction for local lobbying expenses (sec. 3305 of the 
        House bill, sec. 13308 of the Senate amendment, and sec. 162(e) 
        of the Code)

                              PRESENT LAW

In general
      A taxpayer generally is allowed a deduction for ordinary 
and necessary expenses paid or incurred in carrying on any 
trade or business.\735\ However, section 162(e) denies a 
deduction for amounts paid or incurred in connection with (1) 
influencing legislation,\736\ (2) participation in, or 
intervention in, any political campaign on behalf of (or in 
opposition to) any candidate for public office, (3) any attempt 
to influence the general public, or segments thereof, with 
respect to elections, legislative matters, or referendums, or 
(4) any direct communication with a covered executive branch 
official\737\ in an attempt to influence the official actions 
or positions of such official. Expenses paid or incurred in 
connection with lobbying and political activities (such as 
research for, or preparation, planning, or coordination of, any 
previously described activity) also are not deductible.\738\
---------------------------------------------------------------------------
    \735\Sec. 162(a).
    \736\The term ``influencing legislation'' means any attempt to 
influence any legislation through communication with any member or 
employee of a legislative body, or with any government official or 
employee who may participate in the formulation of legislation. The 
term ``legislation'' includes actions with respect to Acts, bills, 
resolutions, or similar items by the Congress, any State legislature, 
any local council, or similar governing body, or by the public in a 
referendum, initiative, constitutional amendment, or similar procedure. 
Secs. 162(e)(4) and 4911(e)(2).
    \737\The term ``covered executive branch official'' means (1) the 
President, (2) the Vice President, (3) any officer or employee of the 
White House Office of the Executive Office of the President, and the 
two most senior level officers of each of the other agencies in such 
Executive Office, (4) any individual servicing in a position in level I 
of the Executive Schedule under section 5312 of title 5, United States 
Code, (5) any other individual designated by the President as having 
Cabinet-level status, and (6) any immediate deputy of an individual 
described in (4) or (5). Sec. 162(e)(6).
    \738\Sec. 162(e)(5)(C).
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Exceptions
            Local legislation
      Notwithstanding the above, a deduction is allowed for 
ordinary and necessary expenses incurred in connection with any 
legislation of any local council or similar governing body 
(``local legislation'').\739\ With respect to local 
legislation, the exception permits a deduction for amounts paid 
or incurred in carrying on any trade or business (1) in direct 
connection with appearances before, submission of statements 
to, or sending communications to the committees or individual 
members of such council or body with respect to legislation or 
proposed legislation of direct interest to the taxpayer, or (2) 
in direct connection with communication of information between 
the taxpayer and an organization of which the taxpayer is a 
member with respect to any such legislation or proposed 
legislation which is of direct interest to the taxpayer and 
such organization, and (3) that portion of the dues paid or 
incurred with respect to any organization of which the taxpayer 
is a member which is attributable to the expenses of the 
activities described in (1) or (2) carried on by such 
organization.\740\
---------------------------------------------------------------------------
    \739\Sec. 162(e)(2)(A).
    \740\Sec. 162(e)(2)(B).
---------------------------------------------------------------------------
      For purposes of this exception, legislation of an Indian 
tribal government is treated in the same manner as local 
legislation.\741\
---------------------------------------------------------------------------
    \741\Sec. 162(e)(7).
---------------------------------------------------------------------------
            De minimis
      For taxpayers with $2,000 or less of in-house 
expenditures related to lobbying and political activities, a de 
minimis exception is provided that permits a deduction.\742\
---------------------------------------------------------------------------
    \742\Sec. 162(e)(5)(B).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision repeals the exception for amounts paid or 
incurred related to lobbying local councils or similar 
governing bodies, including Indian tribal governments. Thus, 
the general disallowance rules applicable to lobbying and 
political expenditures will apply to costs incurred related to 
such local legislation.
      Effective date.--The provision applies to amounts paid or 
incurred after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill other than to 
change the effective date so that the provision applies to 
amounts paid or incurred on or after the date of enactment.
      Effective date.--The provision applies to amounts paid or 
incurred on or after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
6. Repeal of deduction for income attributable to domestic production 
        activities (sec. 3306 of the House bill, sec. 13305 of the 
        Senate amendment, and sec. 199 of the Code)

                              PRESENT LAW

In general
      Section 199 provides a deduction from taxable income (or, 
in the case of an individual, adjusted gross income\743\) that 
is equal to nine percent of the lesser of the taxpayer's 
qualified production activities income or taxable income 
(determined without regard to the section 199 deduction) for 
the taxable year.\744\ For corporations subject to the 35-
percent corporate income tax rate, the nine-percent deduction 
effectively reduces the corporate income tax rate to slightly 
less than 32 percent on qualified production activities 
income.\745\ A similar reduction applies to the graduated rates 
applicable to individuals with qualifying domestic production 
activities income.
---------------------------------------------------------------------------
    \743\For this purpose, adjusted gross income is determined after 
application of sections 86, 135, 137, 219, 221, 222, and 469, without 
regard to the section 199 deduction. Sec. 199(d)(2).
    \744\Sec. 199(a). In the case of oil related qualified production 
activities income, the deduction from taxable income is equal to six 
percent of the lesser of the taxpayer's oil related qualified 
production activities income, qualified production activities income, 
or taxable income. Sec. 199(d)(9).
    \745\This example assumes the deduction does not exceed the wage 
limitation discussed below.
---------------------------------------------------------------------------
      In general, qualified production activities income is 
equal to domestic production gross receipts reduced by the sum 
of: (1) the costs of goods sold that are allocable to those 
receipts; and (2) other expenses, losses, or deductions which 
are properly allocable to those receipts.\746\
---------------------------------------------------------------------------
    \746\Sec. 199(c)(1). In computing qualified production activities 
income, the domestic production activities deduction itself is not an 
allocable deduction. Sec. 199(c)(1)(B)(ii). See Treas. Reg. secs. 
1.199-1 through 1.199-9 where the Secretary has prescribed rules for 
the proper allocation of items of income, deduction, expense, and loss 
for purposes of determining qualified production activities income.
---------------------------------------------------------------------------
      Domestic production gross receipts generally are gross 
receipts of a taxpayer that are derived from: (1) any sale, 
exchange, or other disposition, or any lease, rental, or 
license, of qualifying production property\747\ that was 
manufactured, produced, grown or extracted by the taxpayer in 
whole or in significant part within the United States;\748\ (2) 
any sale, exchange, or other disposition, or any lease, rental, 
or license, of qualified film\749\ produced by the taxpayer; 
(3) any sale, exchange, or other disposition, or any lease, 
rental, or license, of electricity, natural gas, or potable 
water produced by the taxpayer in the United States; (4) 
construction of real property performed in the United States by 
a taxpayer in the ordinary course of a construction trade or 
business; or (5) engineering or architectural services 
performed in the United States for the construction of real 
property located in the United States.\750\
---------------------------------------------------------------------------
    \747\Qualifying production property generally includes any tangible 
personal property, computer software, and sound recordings. Sec. 
199(c)(5).
    \748\When used in the Code in a geographical sense, the term 
``United States'' generally includes only the States and the District 
of Columbia. Sec. 7701(a)(9). A special rule for determining domestic 
production gross receipts, however, provides that for taxable years 
beginning after December 31, 2005, and before January 1, 2017, in the 
case of any taxpayer with gross receipts from sources within the 
Commonwealth of Puerto Rico, the term ``United States'' includes the 
Commonwealth of Puerto Rico, but only if all of the taxpayer's Puerto 
Rico-sourced gross receipts are taxable under the Federal income tax 
for individuals or corporations for such taxable year. Secs. 
199(d)(8)(A) and (C). In computing the 50-percent wage limitation, the 
taxpayer is permitted to take into account wages paid to bona fide 
residents of Puerto Rico for services performed in Puerto Rico. Sec. 
199(d)(8)(B).
    \749\Qualified film includes any motion picture film or videotape 
(including live or delayed television programming, but not including 
certain sexually explicit productions) if 50 percent or more of the 
total compensation relating to the production of the film (including 
compensation in the form of residuals and participations) constitutes 
compensation for services performed in the United States by actors, 
production personnel, directors, and producers. Sec. 199(c)(6).
    \750\Sec. 199(c)(4)(A).
---------------------------------------------------------------------------
      The amount of the deduction for a taxable year is limited 
to 50 percent of the W-2 wages paid by the taxpayer, and 
properly allocable to domestic production gross receipts, 
during the calendar year that ends in such taxable year.\751\
---------------------------------------------------------------------------
    \751\Sec. 199(b)(1). For purposes of the provision, ``W-2 wages'' 
include the sum of the amounts of wages as defined in section 3401(a) 
and elective deferrals that the taxpayer properly reports to the Social 
Security Administration with respect to the employment of employees of 
the taxpayer during the calendar year ending during the taxpayer's 
taxable year. Elective deferrals include elective deferrals as defined 
in section 402(g)(3), amounts deferred under section 457, and 
designated Roth contributions as defined in section 402A. See sec. 
199(b)(2)(A). The wage limitation for qualified films includes any 
compensation for services performed in the United States by actors, 
production personnel, directors, and producers and is not restricted to 
W-2 wages. Sec. 199(b)(2)(D).
---------------------------------------------------------------------------
Agricultural and horticultural cooperatives
      With regard to member-owned agricultural and 
horticultural cooperatives formed under Subchapter T of the 
Code, section 199 provides the same treatment of qualified 
production activities income derived from agricultural or 
horticultural products that are manufactured, produced, grown, 
or extracted by cooperatives,\752\ or that are marketed through 
cooperatives, as it provides for qualified production 
activities income of other taxpayers (i.e., the cooperative may 
claim a deduction from qualified production activities income).
---------------------------------------------------------------------------
    \752\For this purpose, agricultural or horticultural products also 
include fertilizer, diesel fuel and other supplies used in agricultural 
or horticultural production that are manufactured, produced, grown, or 
extracted by the cooperative.
---------------------------------------------------------------------------
      In addition, section 199(d)(3)(A) provides that the 
amount of any patronage dividends or per-unit retain 
allocations paid to a member of an agricultural or 
horticultural cooperative (to which Part I of Subchapter T 
applies), which is allocable to the portion of qualified 
production activities income of the cooperative that is 
deductible under the provision, is deductible from the gross 
income of the member. In order to qualify, such amount must be 
designated by the organization as allocable to the deductible 
portion of qualified production activities income in a written 
notice mailed to its patrons not later than the payment period 
described in section 1382(d). In addition, section 199(d)(3)(B) 
provides that the cooperative cannot reduce its income under 
section 1382 (e.g., cannot claim a dividends-paid deduction) 
for such amounts.

                               HOUSE BILL

      The provision repeals the deduction for income 
attributable to domestic production activities.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.
      Effective date.--The provision is effective for non-
corporate taxpayers and for certain rules applicable to 
agricultural and horticultural cooperates provided in section 
199(d)(3)(A) and (B) for taxable years beginning after December 
31, 2017. The provision is effective for C corporations for 
taxable years beginning after December 31, 2018.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
7. Entertainment, etc. expenses (sec. 3307 of the House bill, sec. 
        13304 of the Senate amendment, and sec. 274 of the Code)

                              PRESENT LAW

In general
      No deduction is allowed with respect to (1) an activity 
generally considered to be entertainment, amusement, or 
recreation (``entertainment''), unless the taxpayer establishes 
that the item was directly related to (or, in certain cases, 
associated with) the active conduct of the taxpayer's trade or 
business, or (2) a facility (e.g., an airplane) used in 
connection with such activity.\753\ If the taxpayer establishes 
that entertainment expenses are directly related to (or 
associated with) the active conduct of its trade or business, 
the deduction generally is limited to 50 percent of the amount 
otherwise deductible.\754\ Similarly, a deduction for any 
expense for food or beverages generally is limited to 50 
percent of the amount otherwise deductible.\755\ In addition, 
no deduction is allowed for membership dues with respect to any 
club organized for business, pleasure, recreation, or other 
social purpose.\756\
---------------------------------------------------------------------------
    \753\Sec. 274(a)(1).
    \754\Sec. 274(n)(1)(B).
    \755\Sec. 274(n)(1)(A).
    \756\Sec. 274(a)(3).
---------------------------------------------------------------------------
      There are a number of exceptions to the general rule 
disallowing deduction of entertainment expenses and the rules 
limiting deductions to 50 percent of the otherwise deductible 
amount. Under one such exception, those rules do not apply to 
expenses for goods, services, and facilities to the extent that 
the expenses are reported by the taxpayer as compensation and 
as wages to an employee.\757\ Those rules also do not apply to 
expenses for goods, services, and facilities to the extent that 
the expenses are includible in the gross income of a recipient 
who is not an employee (e.g., a nonemployee director) as 
compensation for services rendered or as a prize or award.\758\ 
The exceptions apply only to the extent that amounts are 
properly reported by the company as compensation and wages or 
otherwise includible in income. In no event can the amount of 
the deduction exceed the amount of the taxpayer's actual cost, 
even if a greater amount (i.e., fair market value) is 
includible in income.\759\
---------------------------------------------------------------------------
    \757\Sec. 274(e)(2)(A). See below for a discussion of the recent 
modification of this rule for certain individuals.
    \758\Sec. 274(e)(9).
    \759\Treas. Reg. sec. 1.162-25T(a).
---------------------------------------------------------------------------
      Those deduction disallowance rules also do not apply to 
expenses paid or incurred by the taxpayer, in connection with 
the performance of services for another person (other than an 
employer), under a reimbursement or other expense allowance 
arrangement if the taxpayer accounts for the expenses to such 
person.\760\ Another exception applies for expenses for 
recreational, social, or similar activities primarily for the 
benefit of employees other than certain owners and highly 
compensated employees.\761\ An exception applies also to the 50 
percent deduction limit for food and beverages provided to crew 
members of certain commercial vessels and certain oil or gas 
platform or drilling rig workers.\762\
---------------------------------------------------------------------------
    \760\Sec. 274(e)(3).
    \761\Sec. 274(e)(4).
    \762\Sec. 274(n)(2)(E).
---------------------------------------------------------------------------
Expenses treated as compensation
      Except as otherwise provided, gross income includes 
compensation for services, including fees, commissions, fringe 
benefits, and similar items.\763\ In general, an employee (or 
other service provider) must include in gross income the amount 
by which the fair market value of a fringe benefit exceeds the 
sum of the amount (if any) paid by the individual and the 
amount (if any) specifically excluded from gross income.\764\ 
Treasury regulations provide detailed rules regarding the 
valuation of certain fringe benefits, including flights on an 
employer-provided aircraft. In general, the value of a non-
commercial flight generally is determined under the base 
aircraft valuation formula, also known as the Standard Industry 
Fare Level formula or ``SIFL.''\765\ If the SIFL valuation 
rules do not apply, the value of a flight on an employer-
provided aircraft generally is equal to the amount that an 
individual would have to pay in an arm's-length transaction to 
charter the same or a comparable aircraft for that period for 
the same or a comparable flight.\766\
---------------------------------------------------------------------------
    \763\Sec. 61(a)(1).
    \764\Treas. Reg. sec. 1.61-21(b)(1).
    \765\Treas. Reg. sec. 1.61-21(g)(5).
    \766\Treas. Reg. sec. 1.61-21(b)(6).
---------------------------------------------------------------------------
      In the context of an employer providing an aircraft to 
employees for nonbusiness (e.g., vacation) flights, the 
exception for expenses treated as compensation has been 
interpreted as not limiting the company's deduction for 
expenses attributable to the operation of the aircraft to the 
amount of compensation reportable to its employees.\767\ The 
result of that interpretation is often a deduction several 
times larger than the amount required to be included in income. 
Further, in many cases, the individual including amounts 
attributable to personal travel in income directly benefits 
from the enhanced deduction, resulting in a net deduction for 
the personal use of the company aircraft.
---------------------------------------------------------------------------
    \767\Sutherland Lumber-Southwest, Inc. v. Commissioner, 114 T.C. 
197 (2000), aff'd, 255 F.3d 495 (8th Cir. 2001).
---------------------------------------------------------------------------
      The exceptions for expenses treated as compensation or 
otherwise includible income were subsequently modified in the 
case of specified individuals such that the exceptions apply 
only to the extent of the amount of expenses treated as 
compensation or includible in income of the specified 
individual.\768\ Specified individuals are individuals who, 
with respect to an employer or other service recipient (or a 
related party), are subject to the requirements of section 
16(a) of the Securities Exchange Act of 1934, or would be 
subject to such requirements if the employer or service 
recipient (or related party) were an issuer of equity 
securities referred to in section 16(a).\769\
---------------------------------------------------------------------------
    \768\Sec. 274(e)(2)(B)(i). See also Treas. Reg. sec. 1.274-9(a).
    \769\Sec. 274(e)(2)(B)(ii). See also Treas. Reg. sec. 1.274-9(b).
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      As a result, in the case of specified individuals, no 
deduction is allowed with respect to expenses for (1) a 
nonbusiness activity generally considered to be entertainment, 
amusement or recreation, or (2) a facility (e.g., an airplane) 
used in connection with such activity to the extent that such 
expenses exceed the amount treated as compensation or 
includible in income to the specified individual. For example, 
a company's deduction attributable to aircraft operating costs 
and other expenses for a specified individual's vacation use of 
a company aircraft is limited to the amount reported as 
compensation to the specified individual. However, in the case 
of other employees or service providers, the company's 
deduction is not limited to the amount treated as compensation 
or includible in income.\770\
---------------------------------------------------------------------------
    \770\See Treas. Reg. sec. 1.274-10(a)(2).
---------------------------------------------------------------------------
Excludable fringe benefits
      Certain employer-provided fringe benefits are excluded 
from an employee's gross income and wages for employment tax 
purposes, including, but not limited to, de minimis fringes, 
qualified transportation fringes, on-premises athletic 
facilities, and meals provided for the ``convenience of the 
employer.''\771\
---------------------------------------------------------------------------
    \771\Secs. 132(a), 119(a), 3121(a)(19) and (20), 3231(e)(5) and 
(9), 3306(b)(14) and (16), and 3401(a)(19).
---------------------------------------------------------------------------
      A de minimis fringe generally means any property or 
service the value of which is (taking into account the 
frequency with which similar fringes are provided by the 
employer) so small as to make accounting for it unreasonable or 
administratively impracticable,\772\ and also includes food and 
beverages provided to employees through an eating facility 
operated by the employer that is located on or near the 
employer's business premises and meets certain 
requirements.\773\
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    \772\Sec. 132(e)(1). Examples include occasional personal use of an 
employer's copying machine, occasional parties or meals for employees 
and their guests, local telephone calls, and coffee, doughnuts and soft 
drinks. Treas. Reg. sec. 1.132-6(e)(1).
    \773\Sec. 132(e)(2). Revenue derived from such a facility must 
normally equal or exceed the direct operating costs of the facility. 
Employees who are entitled, under Section 119, to exclude the value of 
a meal provided at such a facility are treated as having paid an amount 
for the meal equal to the direct operating costs of the facility 
attributable to such meal.
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      Qualified transportation fringes include qualified 
parking (parking on or near the employer's business premises or 
on or near a location from which the employee commutes to work 
by public transit), transit passes, vanpool benefits, and 
qualified bicycle commuting reimbursements.\774\
---------------------------------------------------------------------------
    \774\Sec. 132(f)(1), (5). The qualified transportation fringe 
exclusions are subject to monthly limits. Sec. 132(f)(2).
---------------------------------------------------------------------------
      On-premises athletic facilities are gyms or other 
athletic facilities located on the employer's premises, 
operated by the employer, and substantially all the use of 
which is by employees of the employer, their spouses, and their 
dependent children.\775\
---------------------------------------------------------------------------
    \775\Sec. 132(j)(4).
---------------------------------------------------------------------------
      The value of meals furnished to an employee or the 
employee's spouse or dependents by or on behalf of an employer 
for the convenience of the employer is excludible from the 
employee's gross income, but only if such meals are provided on 
the employer's business premises.\776\
---------------------------------------------------------------------------
    \776\Sec. 119(a).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision provides that no deduction is allowed with 
respect to (1) an activity generally considered to be 
entertainment, amusement or recreation, (2) membership dues 
with respect to any club organized for business, pleasure, 
recreation or other social purposes, (3) a de minimis fringe 
that is primarily personal in nature and involving property or 
services that are not directly related to the taxpayer's trade 
or business, (4) a facility or portion thereof used in 
connection with any of the above items, (5) a qualified 
transportation fringe, including costs of operating a facility 
used for qualified parking, and (6) an on-premises athletic 
facility provided by an employer to its employees, including 
costs of operating such a facility. Thus, the provision repeals 
the present-law exception to the deduction disallowance for 
entertainment, amusement, or recreation that is directly 
related to (or, in certain cases, associated with) the active 
conduct of the taxpayer's trade or business (and the related 
rule applying a 50 percent limit to such deductions). The 
provision also repeals the present-law exception for 
recreational, social, or similar activities primarily for the 
benefit of employees. However, taxpayers may still, generally, 
deduct 50 percent of the food and beverage expenses associated 
with operating their trade or business (e.g., meals consumed by 
employees on work travel).
      Under the provision, in the case of all individuals (not 
just specified individuals), the exceptions to the general 
entertainment expense disallowance rule for expenses treated as 
compensation or includible in income apply only to the extent 
of the amount of expenses treated as compensation or includible 
in income. Thus, under those exceptions, no deduction is 
allowed with respect to expenses for (1) a nonbusiness activity 
generally considered to be entertainment, amusement or 
recreation, or (2) a facility (e.g., an airplane) used in 
connection with such activity to the extent that such expenses 
exceed the amount treated as compensation or includible in 
income. As under present law, the exceptions apply only if 
amounts are properly reported by the company as compensation 
and wages or otherwise includible in income.
      The provision amends the present-law exception for 
reimbursed expenses. The provision disallows a deduction for 
amounts paid or incurred by a taxpayer in connection with the 
performance of services for another person (other than an 
employer) under a reimbursement or other expense allowance 
arrangement if the person for whom the services are performed 
is a tax-exempt entity\777\ or the arrangement is designated by 
the Secretary as having the effect of avoiding the 50 percent 
deduction disallowance.
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    \777\As defined in section 168(h)(2)(A), i.e., Federal, State and 
local government entities, organizations (other than certain 
cooperatives) exempt from income tax, any foreign person or entity, and 
any Indian tribal government.
---------------------------------------------------------------------------
      The provision clarifies that the exception to the 50 
percent deduction limit for food or beverages applies to any 
expense excludible from the gross income of the recipient 
related to meals furnished for the convenience of the employer. 
The provision thereby repeals as deadwood the special 
exceptions for food or beverages provided to crew members of 
certain commercial vessels and certain oil or gas platform or 
drilling rig workers.
      Effective date.--The provision applies to amounts paid or 
incurred after December 31, 2017.

                            SENATE AMENDMENT

      The provision provides that no deduction is allowed with 
respect to (1) an activity generally considered to be 
entertainment, amusement or recreation, (2) membership dues 
with respect to any club organized for business, pleasure, 
recreation or other social purposes, or (3) a facility or 
portion thereof used in connection with any of the above items. 
Thus, the provision repeals the present-law exception to the 
deduction disallowance for entertainment, amusement, or 
recreation that is directly related to (or, in certain cases, 
associated with) the active conduct of the taxpayer's trade or 
business (and the related rule applying a 50 percent limit to 
such deductions).
      In addition, the provision disallows a deduction for 
expenses associated with providing any qualified transportation 
fringe to employees of the taxpayer, and except as necessary 
for ensuring the safety of an employee, any expense incurred 
for providing transportation (or any payment or reimbursement) 
for commuting between the employee's residence and place of 
employment.
      Taxpayers may still generally deduct 50 percent of the 
food and beverage expenses associated with operating their 
trade or business (e.g., meals consumed by employees on work 
travel). For amounts incurred and paid after December 31, 2017 
and until December 31, 2025, the provision expands this 50 
percent limitation to expenses of the employer associated with 
providing food and beverages to employees through an eating 
facility that meets requirements for de minimis fringes and for 
the convenience of the employer. Such amounts incurred and paid 
after December 31, 2025 are not deductible.
      Effective date.--The provision generally applies to 
amounts paid or incurred after December 31, 2017. However, for 
expenses of the employer associated with providing food and 
beverages to employees through an eating facility that meets 
requirements for de minimis fringes and for the convenience of 
the employer, amounts paid or incurred after December 31, 2025 
are not deductible.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
8. Repeal of exclusion, etc., for employee achievement awards (sec. 
        1403 of the House bill, sec. 13310 of the Senate amendment, and 
        secs. 74(c) and 274(j) of the Code)

                              PRESENT LAW

      An employer's deduction for the cost of an employee 
achievement award is limited to a certain amount.\778\ Employee 
achievement awards that are deductible by an employer (or would 
be deductible but for the fact that the employer is a tax-
exempt organization) are excludible from an employee's gross 
income.\779\ Amounts that are excludible from gross income 
under section 74(c) for income tax purposes are also excluded 
from wages for employment tax purposes.
---------------------------------------------------------------------------
    \778\Sec. 274(j).
    \779\Sec. 74(c).
---------------------------------------------------------------------------
      An employee achievement award is an item of tangible 
personal property given to an employee in recognition of either 
length of service or safety achievement and presented as part 
of a meaningful presentation.

                               HOUSE BILL

      The provision repeals the deduction limitation for 
employee achievement awards. It also repeals the exclusions 
from gross income and wages.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment adds a definition of ``tangible 
personal property'' that may be considered a deductible 
employee achievement award. It provides that tangible personal 
property shall not include cash, cash equivalents, gift cards, 
gift coupons or gift certificates (other than arrangements 
conferring only the right to select and receive tangible 
personal property from a limited array of such items pre-
selected or pre-approved by the employer), or vacations, meals, 
lodging, tickets to theater or sporting events, stocks, bonds, 
other securities, and other similar items. No inference is 
intended that this is a change from present law and guidance.
      Effective date.--The provision applies to amounts paid or 
incurred after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
9. Unrelated business taxable income increased by amount of certain 
        fringe benefit expenses for which deduction is disallowed (sec. 
        3308 of the House bill and sec. 512 of the Code)

                              PRESENT LAW

Tax exemption for certain organizations
      Section 501(a) exempts certain organizations from Federal 
income tax. Such organizations include: (1) tax-exempt 
organizations described in section 501(c) (including among 
others section 501(c)(3) charitable organizations and section 
501(c)(4) social welfare organizations); (2) religious and 
apostolic organizations described in section 501(d); and (3) 
trusts forming part of a pension, profit-sharing, or stock 
bonus plan of an employer described in section 401(a).
Unrelated business income tax, in general
      The unrelated business income tax (``UBIT'') generally 
applies to income derived from a trade or business regularly 
carried on by the organization that is not substantially 
related to the performance of the organization's tax-exempt 
functions.\780\ An organization that is subject to UBIT and 
that has $1,000 or more of gross unrelated business taxable 
income must report that income on Form 990-T (Exempt 
Organization Business Income Tax Return).
---------------------------------------------------------------------------
    \780\Secs. 511-514.
---------------------------------------------------------------------------
      Most exempt organizations may operate an unrelated trade 
or business so long as the organization remains primarily 
engaged in activities that further its exempt purposes. 
Therefore, an organization may engage in a substantial amount 
of unrelated business activity without jeopardizing its exempt 
status. A section 501(c)(3) (charitable) organization, however, 
may not operate an unrelated trade or business as a substantial 
part of its activities.\781\ Therefore, the unrelated trade or 
business activity of a section 501(c)(3) organization must be 
insubstantial.
---------------------------------------------------------------------------
    \781\Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
      An organization determines its unrelated business taxable 
income by subtracting from its gross unrelated business income 
deductions directly connected with the unrelated trade or 
business.\782\ Under regulations, in determining unrelated 
business taxable income, an organization that operates multiple 
unrelated trades or businesses aggregates income from all such 
activities and subtracts from the aggregate gross income the 
aggregate of deductions.\783\ As a result, an organization may 
use a loss from one unrelated trade or business to offset gain 
from another, thereby reducing total unrelated business taxable 
income.
---------------------------------------------------------------------------
    \782\Sec. 512(a).
    \783\Treas. Reg. sec. 1.512(a)-1(a).
---------------------------------------------------------------------------
Organizations subject to tax on unrelated business income
      Most exempt organizations are subject to the tax on 
unrelated business income. Specifically, organizations subject 
to the unrelated business income tax generally include: (1) 
organizations exempt from tax under section 501(a), including 
organizations described in section 501(c) (except for U.S. 
instrumentalities and certain charitable trusts); (2) qualified 
pension, profit-sharing, and stock bonus plans described in 
section 401(a); and (3) certain State colleges and 
universities.\784\
---------------------------------------------------------------------------
    \784\Sec. 511(a)(2).
---------------------------------------------------------------------------
Exclusions from Unrelated Business Taxable Income
      Certain types of income are specifically exempt from 
unrelated business taxable income, such as dividends, interest, 
royalties, and certain rents,\785\ unless derived from debt-
financed property or from certain 50-percent controlled 
subsidiaries.\786\ Other exemptions from UBIT are provided for 
activities in which substantially all the work is performed by 
volunteers, for income from the sale of donated goods, and for 
certain activities carried on for the convenience of members, 
students, patients, officers, or employees of a charitable 
organization. In addition, special UBIT provisions exempt from 
tax activities of trade shows and State fairs, income from 
bingo games, and income from the distribution of low-cost items 
incidental to the solicitation of charitable contributions. 
Organizations liable for tax on unrelated business taxable 
income may be liable for alternative minimum tax determined 
after taking into account adjustments and tax preference items.
---------------------------------------------------------------------------
    \785\Secs. 511-514.
    \786\Sec. 512(b)(13).
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the provision, unrelated business taxable income 
includes any expenses paid or incurred by a tax exempt 
organization for qualified transportation fringe benefits (as 
defined in section 132(f)), a parking facility used in 
connection with qualified parking (as defined in section 
132(f)(5)(C)), or any on-premises athletic facility (as defined 
in section 132(j)(4)(B)), provided such amounts are not 
deductible under section 274.
      Effective date.--The provision is effective for amounts 
paid or incurred after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
10. Limitation on deduction for FDIC premiums (sec. 3309 of the House 
        bill, sec. 13531 of the Senate amendment, and sec. 162 of the 
        Code)

                              PRESENT LAW

      Corporations organized under the laws of any of the 50 
States (and the District of Columbia) generally are subject to 
the U.S. corporate income tax on their worldwide taxable 
income. The taxable income of a C corporation\787\ generally 
comprises gross income less allowable deductions. A taxpayer 
generally is allowed a deduction for ordinary and necessary 
expenses paid or incurred in carrying on any trade or 
business.\788\
---------------------------------------------------------------------------
    \787\Corporations subject to tax are commonly referred to as C 
corporations after subchapter C of the Code, which sets forth corporate 
tax rules. Certain specialized entities that invest primarily in real 
estate related assets (real estate investment trusts) or in stock and 
securities (regulated investment companies) and that meet other 
requirements, generally including annual distribution of 90 percent of 
their income, are allowed to deduct their distributions to 
shareholders, thus generally paying little or no corporate-level tax 
despite otherwise being subject to subchapter C.
    \788\Sec. 162(a). However, certain exceptions apply. No deduction 
is allowed for (1) any charitable contribution or gift that would be 
allowable as a deduction under section 170 were it not for the 
percentage limitations, the dollar limitations, or the requirements as 
to the time of payment, set forth in such section; (2) any illegal 
bribe, illegal kickback, or other illegal payment; (3) certain lobbying 
and political expenditures; (4) any fine or similar penalty paid to a 
government for the violation of any law; (5) two-thirds of treble 
damage payments under the antitrust laws; (6) certain foreign 
advertising expenses; (7) certain amounts paid or incurred by a 
corporation in connection with the reacquisition of its stock or of the 
stock of any related person; or (8) certain applicable employee 
remuneration.
---------------------------------------------------------------------------
      Corporations that make a valid election pursuant to 
section 1362 of subchapter S of the Code, referred to as S 
corporations, generally are not subject to corporate-level 
income tax on its items of income and loss. Instead, an S 
corporation passes through to shareholders its items of income 
and loss. The shareholders separately take into account their 
shares of these items on their individual income tax returns.
Banks, thrifts, and credit unions
            In general
      Financial institutions are subject to the same Federal 
income tax rules and rates as are applied to other corporations 
or entities, with specified exceptions.
            C corporation banks and thrifts
      A bank is generally taxed for Federal income tax purposes 
as a C corporation. For this purpose a bank generally means a 
corporation, a substantial portion of whose business is 
receiving deposits and making loans and discounts, or 
exercising certain fiduciary powers.\789\ A bank for this 
purpose generally includes domestic building and loan 
associations, mutual stock or savings banks, and certain 
cooperative banks that are commonly referred to as 
thrifts.\790\
---------------------------------------------------------------------------
    \789\Sec. 581. See also Treas. Reg. sec. 1.581-1(a).
    \790\While the general principles for determining the taxable 
income of a corporation are applicable to a mutual savings bank, a 
building and loan association, and a cooperative bank, there are 
certain exceptions and special rules for such institutions. Treas. Reg. 
sec. 1.581-2(a).
---------------------------------------------------------------------------
            S corporation banks
      A bank is generally eligible to elect S corporation 
status under section 1362, provided it meets the other 
requirements for making this election and it does not use the 
reserve method of accounting for bad debts as described in 
section 585.\791\
---------------------------------------------------------------------------
    \791\Sec. 1361(b)(2)(A).
---------------------------------------------------------------------------
            Special bad debt loss rules for small banks
      Section 166 provides a deduction for any debt that 
becomes worthless (wholly or partially) within a taxable year. 
The reserve method of accounting for bad debts, repealed in 
1986\792\ for most taxpayers, is allowed under section 585 for 
any bank (as defined in section 581) other than a large bank. 
For this purpose, a bank is a large bank if, for the taxable 
year (or for any preceding taxable year after 1986), the 
average adjusted basis of all its assets (or the assets of the 
controlled group of which it is a member) exceeds $500 million. 
Deductions for reserves are taken in lieu of a worthless debt 
deduction under section 166. Accordingly, a small bank is able 
to take deductions for additions to a bad debt reserve. 
Additions to the reserve are determined under an experience 
method that generally looks to the ratio of (1) the total bad 
debts sustained during the taxable year and the five preceding 
taxable years to (2) the sum of the loans outstanding at the 
close of such taxable years.\793\
---------------------------------------------------------------------------
    \792\Tax Reform Act of 1986, Pub. L. No. 99-514.
    \793\Sec. 585(b)(2).
---------------------------------------------------------------------------
            Credit unions
      Credit unions are exempt from Federal income 
taxation.\794\ The exemption is based on their status as not-
for-profit mutual or cooperative organizations (without capital 
stock) operated for the benefit of their members, who generally 
must share a common bond. The definition of common bond has 
been expanded to permit greater use of credit unions.\795\ 
While significant differences between the rules under which 
credit unions and banks operate have existed in the past, most 
of those differences have disappeared over time.\796\
---------------------------------------------------------------------------
    \794\Sec. 501(c)(14)(A). For a discussion of the history of and 
reasons for Federal tax exemption, see United States Department of the 
Treasury, Comparing Credit Unions with Other Depository Institutions, 
Report 3070, January 15, 2001, available at https://www.treasury.gov/
press-center/press-releases/Documents/report30702.doc.
    \795\The Credit Union Membership Access Act, Pub. L. No. 105-219, 
allows multiple common bond credit unions. The legislation in part 
responds to National Credit Union Administration v. First National Bank 
& Trust Co., 522 U.S. 479 (1998), which interpreted the permissible 
membership of tax-exempt credit unions narrowly.
    \796\The Treasury Department has concluded that any remaining 
regulatory differences do not raise competitive equity concerns between 
credit unions and banks. United States Department of the Treasury, 
Comparing Credit Unions with Other Depository Institutions, Report 
3070, January 15, 2001, p. 2, available at https://www.treasury.gov/
press-center/press-releases/Documents/report30702.doc.
---------------------------------------------------------------------------
FDIC premiums
      The Federal Deposit Insurance Corporation (``FDIC'') 
provides deposit insurance for banks and savings institutions. 
To maintain its status as an insured depository institution, a 
bank must pay semiannual assessments into the deposit insurance 
fund (``DIF''). Assessments for deposit insurance are treated 
as ordinary and necessary business expenses. These assessments, 
also known as premiums, are deductible once the all events test 
for the premium is satisfied.\797\
---------------------------------------------------------------------------
    \797\Technical Advice Memorandum 199924060, March 5, 1999, and Rev. 
Rul. 80-230, 1980-2 C.B. 169, 1980.
---------------------------------------------------------------------------

                               HOUSE BILL

      No deduction is allowed for the applicable percentage of 
any FDIC premium paid or incurred by the taxpayer. For 
taxpayers with total consolidated assets of $50 billion or 
more, the applicable percentage is 100 percent. Otherwise, the 
applicable percentage is the ratio of the excess of total 
consolidated assets over $10 billion to $40 billion. For 
example, for a taxpayer with total consolidated assets of $20 
billion, no deduction is allowed for 25 percent of FDIC 
premiums. The provision does not apply to taxpayers with total 
consolidated assets (as of the close of the taxable year) that 
do not exceed $10 billion.
      FDIC premium means any assessment imposed under section 
7(b) of the Federal Deposit Insurance Act.\798\ The term total 
consolidated assets has the meaning given such term under 
section 165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act.\799\
---------------------------------------------------------------------------
    \798\12 U.S.C. sec. 1817(b).
    \799\Pub. L. No. 111-203.
---------------------------------------------------------------------------
      For purposes of determining a taxpayer's total 
consolidated assets, members of an expanded affiliated group 
are treated as a single taxpayer. An expanded affiliated group 
means an affiliated group as defined in section 1504(a), 
determined by substituting ``more than 50 percent'' for ``at 
least 80 percent'' each place it appears and without regard to 
the exceptions from the definition of includible corporation 
for insurance companies and foreign corporations. A partnership 
or any other entity other than a corporation is treated as a 
member of an expanded affiliated group if such entity is 
controlled by members of such group.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
11. Repeal of rollover of publicly traded securities gain into 
        specialized small business investment companies (sec. 3310 of 
        the House bill and sec. 1044 of the Code)

                              PRESENT LAW

      A corporation or individual may elect to roll over tax-
free any capital gain realized on the sale of publicly-traded 
securities to the extent of the taxpayer's cost of purchasing 
common stock or a partnership interest in a specialized small 
business investment company within 60 days of the sale.\800\ 
The amount of gain that an individual may elect to roll over 
under this provision for a taxable year is limited to (1) 
$50,000 or (2) $500,000 reduced by the gain previously excluded 
under this provision.\801\ For corporations, these limits are 
$250,000 and $1 million, respectively.\802\
---------------------------------------------------------------------------
    \800\Sec. 1044(a).
    \801\Sec. 1044(b)(1).
    \802\Sec. 1044(b)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill repeals the election described above to 
roll over tax-free capital gain realized on the sale of 
publicly-traded securities.
      Effective date.--The provision applies to sales after 
December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
12. Certain self-created property not treated as a capital asset (sec. 
        3311 of the House bill and sec. 1221 of the Code)

                              PRESENT LAW

      In general, property held by a taxpayer (whether or not 
connected with his trade or business) is considered a capital 
asset.\803\ Certain assets, however, are specifically excluded 
from the definition of capital asset. Such excluded assets are: 
inventory property, property of a character subject to 
depreciation (including real property),\804\ certain self-
created intangibles, accounts or notes receivable acquired in 
the ordinary course of business (e.g., for providing services 
or selling property), publications of the U.S. Government 
received by a taxpayer other than by purchase at the price 
offered to the public, commodities derivative financial 
instruments held by a commodities derivatives dealer unless 
established to the satisfaction of the Secretary that any such 
instrument has no connection to the activities of such dealer 
as a dealer and clearly identified as such before the close of 
the day on which it was acquired, originated, or entered into, 
hedging transactions clearly identified as such, and supplies 
regularly used or consumed by the taxpayer in the ordinary 
course of a trade or business of the taxpayer.\805\
---------------------------------------------------------------------------
    \803\Sec. 1221(a).
    \804\The net gain from the sale, exchange, or involuntary 
conversion of certain property used in the taxpayer's trade or business 
(in excess of depreciation recapture) is treated as long-term capital 
gain. Sec. 1231. However, net gain from such property is treated as 
ordinary income to the extent that losses from such property in the 
previous five years were treated as ordinary losses. Sec. 1231(c).
    \805\Sec. 1221(a)(1)-(8).
---------------------------------------------------------------------------
      Self-created intangibles subject to the exception are 
copyrights, literary, musical, or artistic compositions, 
letters or memoranda, or similar property which is held either 
by the taxpayer who created the property, or (in the case of a 
letter, memorandum, or similar property) a taxpayer for whom 
the property was produced.\806\ For the purpose of determining 
gain, a taxpayer with a substituted or transferred basis from 
the taxpayer who created the property, or for whom the property 
was created, also is subject to the exception.\807\ However, a 
taxpayer may elect to treat musical compositions and copyrights 
in musical works as capital assets.\808\
---------------------------------------------------------------------------
    \806\Sec. 1221(a)(3)(A) and (B).
    \807\Sec. 1221(a)(3)(C).
    \808\Sec. 1221(b)(3). Thus, if a taxpayer who owns musical 
compositions or copyrights in musical works that the taxpayer created 
(or if a taxpayer to which the musical compositions or copyrights have 
been transferred by the works' creator in a substituted basis 
transaction) elects the application of this provision, gain from a sale 
of the compositions or copyrights is treated as capital gain, not 
ordinary income.
---------------------------------------------------------------------------
      Since the intent of Congress is that profits and losses 
arising from everyday business operations be characterized as 
ordinary income and loss, the general definition of capital 
asset is narrowly applied and the categories of exclusions are 
broadly interpreted.\809\
---------------------------------------------------------------------------
    \809\Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 52 
(1955).
---------------------------------------------------------------------------

                               HOUSE BILL

      This provision amends section 1221(a)(3), resulting in 
the exclusion of a patent, invention, model or design (whether 
or not patented), and a secret formula or process which is held 
either by the taxpayer who created the property or a taxpayer 
with a substituted or transferred basis from the taxpayer who 
created the property (or for whom the property was created) 
from the definition of a ``capital asset.'' Thus, gains or 
losses from the sale or exchange of a patent, invention, model 
or design (whether or not patented), or a secret formula or 
process which is held either by the taxpayer who created the 
property or a taxpayer with a substituted or transferred basis 
from the taxpayer who created the property (or for whom the 
property was created) will not receive capital gain treatment.
      Effective date.--The provision applies to dispositions 
after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
13. Repeal of special rule for sale or exchange of patents (sec. 3312 
        of the House bill and sec. 1235 of the Code))

                              PRESENT LAW

      Section 1235 provides that a transfer\810\ of all 
substantial rights to a patent, or an undivided interest 
therein which includes a part of all such rights, by any holder 
shall be considered the sale or exchange of a capital asset 
held for more than one year, regardless of whether or not 
payments in consideration of such transfer are (1) payable 
periodically over a period generally conterminous with the 
transferee's use of the patent, or (2) contingent on the 
productivity, use, or disposition of the property 
transferred.\811\
---------------------------------------------------------------------------
    \810\A transfer by gift, inheritance, or devise is not included.
    \811\Sec. 1235(a).
---------------------------------------------------------------------------
      A holder is defined as (1) any individual whose efforts 
created such property, or (2) any other individual who has 
acquired his interest in such property in exchange for 
consideration in money or money's worth paid to such creator 
prior to actual reduction to practice of the invention covered 
by the patent, if such individual is neither the employer of 
such creator nor related (as defined) to such creator.\812\
---------------------------------------------------------------------------
    \812\Sec. 1235(b).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision repeals section 1235. Thus, the holder of a 
patented invention may not transfer his or her rights to the 
patent and treat amounts received as proceeds from the sale of 
a capital asset. It is intended that the determination of 
whether a transfer is a sale or exchange of a capital asset 
that produces capital gain, or a transaction that produces 
ordinary income, will be determined under generally applicable 
principles.\813\
---------------------------------------------------------------------------
    \813\See also section 3311 of the House bill (Certain self-created 
property not treated as a capital asset).
---------------------------------------------------------------------------
      Effective date.--The provision applies to dispositions 
after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
14. Repeal of technical termination of partnerships (sec. 3313 of the 
        House bill and sec. 708(b) of the Code)

                              PRESENT LAW

      A partnership is considered as terminated under specified 
circumstances.\814\ Special rules apply in the case of the 
merger, consolidation, or division of a partnership.\815\
---------------------------------------------------------------------------
    \814\Sec. 708(b)(1).
    \815\Sec. 708(b)(2). Mergers, consolidations, and divisions of 
partnerships take either an assets-over form or an assets-up form 
pursuant to Treas. Reg. sec. 1.708-1(c).
---------------------------------------------------------------------------
      A partnership is treated as terminated if no part of any 
business, financial operation, or venture of the partnership 
continues to be carried on by any of its partners in a 
partnership.\816\
---------------------------------------------------------------------------
    \816\Sec. 708(b)(1)(A).
---------------------------------------------------------------------------
      A partnership is also treated as terminated if within any 
12-month period, there is a sale or exchange of 50 percent or 
more of the total interest in partnership capital and 
profits.\817\ This is sometimes referred to as a technical 
termination. Under regulations, the technical termination gives 
rise to a deemed contribution of all the partnership's assets 
and liabilities to a new partnership in exchange for an 
interest in the new partnership, followed by a deemed 
distribution of interests in the new partnership to the 
purchasing partners and the other remaining partners.\818\
---------------------------------------------------------------------------
    \817\Sec. 708(b)(1)(B).
    \818\Treas. Reg. sec. 1.708-1(b)(4).
---------------------------------------------------------------------------
      The effect of a technical termination is not necessarily 
the end of the partnership's existence, but rather the 
termination of some tax attributes. Upon a technical 
termination, the partnership's taxable year closes, potentially 
resulting in short taxable years.\819\ Partnership-level 
elections generally cease to apply following a technical 
termination.\820\ A technical termination generally results in 
the restart of partnership depreciation recovery periods.
---------------------------------------------------------------------------
    \819\Sec. 706(c)(1); Treas. Reg. sec. 1.708-1(b)(3).
    \820\Partnership level elections include, for example, the section 
754 election to adjust basis on a transfer or distribution, as well as 
other elections that determine the partnership's tax treatment of 
partnership items. A list of elections can be found at William S. 
McKee, William F. Nelson, and Robert L. Whitmire, Federal Taxation of 
Partnerships and Partners, 4th edition, para. 9.01[7], pp. 9-42--9-44.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision repeals the section 708(b)(1)(B) rule 
providing for technical terminations of partnerships. The 
provision does not change the present-law rule of section 
708(b)(1)(A) that a partnership is considered as terminated if 
no part of any business, financial operation, or venture of the 
partnership continues to be carried on by any of its partners 
in a partnership.
      Effective date.--The provision applies to partnership 
taxable years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
15. Recharacterization of certain gains in the case of partnership 
        profits interests held in connection with performance of 
        investment services (sec. 3314 of the House bill, sec. 13310 of 
        the Senate amendment, and secs. 1061 and 83 of the Code)

                              PRESENT LAW

Partnership profits interest for services
      A profits interest in a partnership is the right to 
receive future profits in the partnership but does not 
generally include any right to receive money or other property 
upon the immediate liquidation of the partnership. The 
treatment of the receipt of a profits interest in a partnership 
(sometimes referred to as a carried interest) in exchange for 
the performance of services has been the subject of 
controversy. Though courts have differed, in some instances, a 
taxpayer receiving a profits interest for performing services 
has not been taxed upon the receipt of the partnership 
interest.\821\
---------------------------------------------------------------------------
    \821\Only a handful of cases have addressed this issue. Though one 
case required the value to be included currently, where value was 
easily determined by a sale of the profits interest soon after receipt 
(Diamond v. Commissioner, 56 T.C. 530 (1971), aff'd 492 F.2d 286 (7th 
Cir. 1974)), a more recent case concluded that partnership profits 
interests were not includable on receipt, because the profits interests 
were speculative and without fair market value (Campbell v. 
Commissioner, 943 F. 2d 815 (8th Cir. 1991)).
---------------------------------------------------------------------------
      In 1993, the Internal Revenue Service, referring to the 
litigation of the tax treatment of receiving a partnership 
profits interest and the results in the cases, issued 
administrative guidance that the IRS generally would treat the 
receipt of a partnership profits interest for services as not a 
taxable event for the partnership or the partner.\822\ Under 
this guidance, this treatment does not apply, however, if: (1) 
the profits interest relates to a substantially certain and 
predictable stream of income from partnership assets, such as 
income from high-quality debt securities or a high-quality net 
lease; (2) within two years of receipt, the partner disposes of 
the profits interest; or (3) the profits interest is a limited 
partnership interest in a publicly traded partnership. More 
recent administrative guidance\823\ clarifies that this 
treatment applies with respect to substantially unvested 
profits interests provided the service partner takes into 
income his distributive share of partnership income, and the 
partnership does not deduct any amount either on grant or on 
vesting of the profits interest.\824\
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    \822\Rev. Proc. 93-27 (1993-2 C.B. 343), citing the Diamond and 
Campbell cases, supra.
    \823\Rev. Proc. 2001-43 (2001-2 C.B. 191). This result applies 
under the guidance even if the interest is substantially nonvested on 
the date of grant.
    \824\A similar result would occur under the ``safe harbor'' 
election under proposed regulations regarding the application of 
section 83 to the compensatory transfer of a partnership interest. REG-
105346-03, 70 Fed. Reg. 29675 (May 24, 2005).
---------------------------------------------------------------------------
      By contrast, a partnership capital interest received for 
services is includable in the partner's income under generally 
applicable rules relating to the receipt of property for the 
performance of services.\825\ A partnership capital interest 
for this purpose is an interest that would entitle the 
receiving partner to a share of the proceeds if the 
partnership's assets were sold at fair market value and the 
proceeds were distributed in liquidation.\826\
---------------------------------------------------------------------------
    \825\Secs. 61 and 83; Treas. Reg. sec. 1.721-1(b)(1); see U.S. v. 
Frazell, 335 F.2d 487 (5th Cir. 1964), cert. denied, 380 U.S. 961 
(1965).
    \826\Rev. Proc. 93-27, 1993-2 C.B. 343.
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Property received for services under section 83
            In general
      Section 83 governs the amount and timing of income and 
deductions attributable to transfers of property in connection 
with the performance of services. If property is transferred in 
connection with the performance of services, the person 
performing the services (the ``service provider'') generally 
must recognize income for the taxable year in which the 
property is first substantially vested (i.e., transferable or 
not subject to a substantial risk of forfeiture).\827\ The 
amount includible in the service provider's income is the 
excess of the fair market value of the property over the amount 
(if any) paid for the property. A deduction is allowed to the 
person for whom such services are performed (the ``service 
recipient'') equal to the amount included in gross income by 
the service provider.\828\ The deduction is allowed for the 
taxable year of the service recipient in which or with which 
ends the taxable year in which the amount is included in the 
service provider's income.
---------------------------------------------------------------------------
    \827\The Department of Treasury has issued proposed regulations 
regarding the application of section 83 to the compensatory transfer of 
a partnership interest. 70 Fed. Reg. 29675 (May 24, 2005). The proposed 
regulations provide that a partnership interest is ``property'' for 
purposes of section 83. Thus, a compensatory transfer of a partnership 
interest is includible in the service provider's gross income at the 
time that it first becomes substantially vested (or, in the case of a 
substantially nonvested partnership interest, at the time of grant if a 
section 83(b) election is made). However, because the fair market value 
of a compensatory partnership interest is often difficult to determine, 
the proposed regulations also permit a partnership and a partner to 
elect a safe harbor under which the fair market value of a compensatory 
partnership interest is treated as being equal to the liquidation value 
of that interest. Therefore, in the case of a true profits interest in 
a partnership (one under which the partner would be entitled to nothing 
if the partnership were liquidated immediately following the grant), 
under the proposed regulations, the grant of a substantially vested 
profits interest (or, if a section 83(b) election is made, the grant of 
a substantially nonvested profits interest) results in no income 
inclusion under section 83 because the fair market value of the 
property received by the service provider is zero. The proposed safe 
harbor is subject to a number of conditions. For example, the election 
cannot be made retroactively and must apply to all compensatory 
partnership transfers that occur during the period that the election is 
in effect.
    \828\Sec. 83(h).
---------------------------------------------------------------------------
      Property that is subject to a substantial risk of 
forfeiture and that is not transferable is generally referred 
to as ``substantially nonvested.'' Property is subject to a 
substantial risk of forfeiture if the individual's right to the 
property is conditioned on the future performance (or 
refraining from performance) of substantial services. In 
addition, a substantial risk of forfeiture exists if the right 
to the property is subject to a condition other than the 
performance of services, provided that the condition relates to 
a purpose of the transfer and there is a substantial 
possibility that the property will be forfeited if the 
condition does not occur.
            Section 83(b) election
      Under section 83(b), even if the property is 
substantially nonvested at the time of transfer, the service 
provider may nevertheless elect within 30 days of the transfer 
to recognize income for the taxable year of the transfer. Such 
an election is referred to as a ``section 83(b) election.'' The 
service provider makes an election by filing with the IRS a 
written statement that includes the fair market value of the 
property at the time of transfer and the amount (if any) paid 
for the property. The service provider must also provide a copy 
of the statement to the service recipient.
Passthrough tax treatment of partnerships
      The character of partnership items passes through to the 
partners, as if the items were realized directly by the 
partners.\829\ Thus, for example, long-term capital gain of the 
partnership is treated as long-term capital gain in the hands 
of the partners.
---------------------------------------------------------------------------
    \829\Sec. 702.
---------------------------------------------------------------------------
      A partner holding a partnership interest includes in 
income its distributive share (whether or not actually 
distributed) of partnership items of income and gain, including 
capital gain eligible for the lower tax rates. A partner's 
basis in the partnership interest is increased by any amount of 
gain thus included and is decreased by losses. These basis 
adjustments prevent double taxation of partnership income to 
the partner, preserving the partnership's tax status as a 
passthrough entity. Money distributed to the partner by the 
partnership is taxed to the extent the amount exceeds the 
partner's basis in the partnership interest.
Net long-term capital gain
      In the case of an individual, estate, or trust, any 
adjusted net capital gain which otherwise would be taxed at the 
10- or 15-percent rate is not taxed. Any adjusted net capital 
gain which otherwise would be taxed at rates over 15 percent 
and below 39.6 percent is taxed at a 15-percent rate. Any 
adjusted net capital gain which otherwise would be taxed at a 
39.6-percent rate is taxed at a 20-percent rate.\830\
---------------------------------------------------------------------------
    \830\Sec. 1. Other rates apply to certain types of gain. The 
unrecaptured section 1250 gain is taxed at a maximum rate of 25 
percent, and 28-percent rate gain is taxed at a maximum rate of 28 
percent. Any amount of unrecaptured section 1250 gain or 28-percent 
rate gain otherwise taxed at a 10- or 15-percent rate is taxed at the 
otherwise applicable rate. In addition, a tax is imposed on net 
investment income in the case of an individual, estate, or trust. In 
the case of an individual, the tax is 3.8 percent of the lesser of net 
investment income, which includes gains and dividends, or the excess of 
modified adjusted gross income over the threshold amount. The threshold 
amount is $250,000 in the case of a joint return or surviving spouse, 
$125,000 in the case of a married individual filing a separate return, 
and $200,000 in the case of any other individual.
---------------------------------------------------------------------------
      In general, gain or loss reflected in the value of an 
asset is not recognized for income tax purposes until a 
taxpayer disposes of the asset. On the sale or exchange of a 
capital asset,\831\ any gain generally is included in income.
---------------------------------------------------------------------------
    \831\Sec. 1221. A capital asset generally means any property except 
(1) inventory, stock in trade, or property held primarily for sale to 
customers in the ordinary course of the taxpayer's trade or business, 
(2) depreciable or real property used in the taxpayer's trade or 
business, (3) specified literary or artistic property, (4) business 
accounts or notes receivable, (5) certain U.S. publications, (6) 
certain commodity derivative financial instruments, (7) hedging 
transactions, and (8) business supplies. In addition, the net gain from 
the disposition of certain property used in the taxpayer's trade or 
business is treated as long-term capital gain. Gain from the 
disposition of depreciable personal property is not treated as capital 
gain to the extent of all previous depreciation allowances. Gain from 
the disposition of depreciable real property is generally not treated 
as capital gain to the extent of the depreciation allowances in excess 
of the allowances available under the straight-line method of 
depreciation.
---------------------------------------------------------------------------
      Short-term capital gain means gain from the sale or 
exchange of a capital asset held for not more than one year, if 
and to the extent such gain is taken into account in computing 
gross income. Net short-term capital loss means the excess of 
short term capital losses for the taxable year over the short-
term capital gains for the taxable year.
      Net long-term capital gain means the excess of long-term 
capital gains for the taxable year over the long-term capital 
losses for the taxable year.
      Net capital gain is the excess of the net long-term 
capital gain for the taxable year over the net short-term 
capital loss for the year. Gain or loss is treated as long-term 
if the asset is held for more than one year.
      The adjusted net capital gain of an individual is the net 
capital gain reduced (but not below zero) by the sum of the 28-
percent rate gain and the unrecaptured section 1250 gain. The 
net capital gain is reduced by the amount of gain that the 
individual treats as investment income for purposes of 
determining the investment interest limitation.\832\
---------------------------------------------------------------------------
    \832\Sec. 163(d).
---------------------------------------------------------------------------

                               HOUSE BILL

General rule
      The provision provides for a three-year holding period in 
the case of certain net long-term capital gain with respect to 
any applicable partnership interest held by the taxpayer.
      Section 83 (relating to property transferred in 
connection with performance of services) does not apply to the 
transfer of a partnership interest to which the provision 
applies.
Short-term capital gain
      The provision treats as short-term capital gain taxed at 
ordinary income rates the amount of the taxpayer's net long-
term capital gain with respect to an applicable partnership 
interest for the taxable year that exceeds the amount of such 
gain calculated as if a three-year (not one-year) holding 
period applies. In making this calculation, the provision takes 
account of long-term capital losses calculated as if a three-
year holding period applies.
      A special rule provides that, as provided in regulations 
or other guidance issued by the Secretary, this rule does not 
apply to income or gain attributable to any asset that is not 
held for portfolio investment on behalf of third party 
investors. Third party investor means a person (1) who holds an 
interest in the partnership that is not property held in 
connection with an applicable trade or business (defined below) 
with respect to that person, and (2) who is not and has not 
been actively engaged in directly or indirectly providing 
substantial services for the partnership or any applicable 
trade or business (and is (or was) not related to a person so 
engaged). A related person for this purpose is a family member 
(within the meaning of attribution rules\833\) or colleague, 
that is a person who performed a service within the current 
calendar year or the preceding three calendar years in any 
applicable trade or business in which or for which the taxpayer 
performed a service.
---------------------------------------------------------------------------
    \833\Sec. 318(a)(1).
---------------------------------------------------------------------------
Applicable partnership interest
      An applicable partnership interest is any interest in a 
partnership that, directly or indirectly, is transferred to (or 
held by) the taxpayer in connection with performance of 
services in any applicable trade or business. The services may 
be performed by the taxpayer or by any other related person or 
persons in any applicable trade or business. It is intended 
that partnership interests shall not fail to be treated as 
transferred or held in connection with the performance of 
services merely because the taxpayer also made contributions to 
the partnership, and the Treasury Department is directed to 
provide guidance implementing this intent. An applicable 
partnership interest does not include an interest held by a 
person who is employed by another entity that is conducting a 
trade or business (which is not an applicable trade or 
business) and who provides services only to the other entity.
      An applicable partnership interest does not include an 
interest in a partnership directly or indirectly held by a 
corporation. For example, if two corporations form a 
partnership to conduct a joint venture for developing and 
marketing a pharmaceutical product, the partnership interests 
held by the two corporations are not applicable partnership 
interests.
      An applicable partnership interest does not include any 
capital interest in a partnership giving the taxpayer a right 
to share in partnership capital commensurate with the amount of 
capital contributed (as of the time the partnership interest 
was received), or commensurate with the value of the 
partnership interest that is taxed under section 83 on receipt 
or vesting of the partnership interest. For example, in the 
case of a partner who holds a capital interest in the 
partnership with respect to capital he or she contributed to 
the partnership, if the partnership agreement provides that the 
partner's share of partnership capital is commensurate with the 
amount of capital he or she contributed (as of the time the 
partnership interest was received) compared to total 
partnership capital, the partnership interest is not an 
applicable partnership interest to that extent.
            Applicable trade or business
      An applicable trade or business means any activity 
(regardless of whether the activity are conducted in one or 
more entities) that consists in whole or in part of the 
following: (1) raising or returning capital, and either (2) 
investing in (or disposing of) specified assets (or identifying 
specified assets for investing or disposition), or (3) 
developing specified assets.
      Developing specified assets takes place, for example, if 
it is represented to investors, lenders, regulators, or others 
that the value, price, or yield of a portfolio business may be 
enhanced or increased in connection with choices or actions of 
a service provider or of others acting in concert with or at 
the direction of a service provider. Services performed as an 
employee of an applicable trade or business are treated as 
performed in an applicable trade or business for purposes of 
this rule. Merely voting shares owned does not amount to 
development; for example, a mutual fund that merely votes 
proxies received with respect to shares of stock it holds is 
not engaged in development.
            Specified assets
      Under the provision, specified assets means securities 
(generally as defined under rules for mark-to-market accounting 
for securities dealers), commodities (as defined under rules 
for mark-to-market accounting for commodities dealers), real 
estate held for rental or investment, cash or cash equivalents, 
options or derivative contracts with respect to such 
securities, commodities, real estate, cash or cash equivalents, 
as well as an interest in a partnership to the extent of the 
partnership's proportionate interest in the foregoing. A 
security for this purpose means any (1) share of corporate 
stock, (2) partnership interest or beneficial ownership 
interest in a widely held or publicly traded partnership or 
trust, (3) note, bond, debenture, or other evidence of 
indebtedness, (4) interest rate, currency, or equity notional 
principal contract, (5) interest in, or derivative financial 
instrument in, any such security or any currency (regardless of 
whether section 1256 applies to the contract), and (6) position 
that is not such a security and is a hedge with respect to such 
a security and is clearly identified. A commodity for this 
purpose means any (1) commodity that is actively traded, (2) 
notional principal contract with respect to such a commodity, 
(3) interest in, or derivative financial instrument in, such a 
commodity or notional principal contract, or (4) position that 
is not such a commodity and is a hedge with respect to such a 
commodity and is clearly identified. For purposes of the 
provision, real estate held for rental or investment does not 
include, for example, real estate on which the holder operates 
an active farm.
      A partnership interest, for purposes of determining the 
proportionate interest of a partnership in any specified asset, 
includes any partnership interest that is not otherwise treated 
as a security for purposes of the provision (for example, an 
interest in a partnership that is not widely held or publicly 
traded). For example, assume that a hedge fund acquires an 
interest in an operating business conducted in the form of a 
non-publicly traded partnership that is not widely held; the 
partnership interest is a specified asset for purposes of the 
provision.
Transfer of applicable partnership interest to related person
      If a taxpayer transfers any applicable partnership 
interest, directly or indirectly, to a person related to the 
taxpayer, then the taxpayer includes in gross income as short-
term capital gain so much of the taxpayer's net long-term 
capital gain attributable to the sale or exchange of an asset 
held for not more than three years as is allocable to the 
interest. The amount included as short-term capital gain on the 
transfer is reduced by the amount treated as short-term capital 
gain on the transfer for the taxable year under the general 
rule of the provision (that is, amounts are not double-
counted). A related person for this purpose is a family member 
(within the meaning of attribution rules\834\) or colleague, 
that is a person who performed a service within the current 
calendar year or the preceding three calendar years in any 
applicable trade or business in which or for which the taxpayer 
performed a service.
---------------------------------------------------------------------------
    \834\Sec. 318(a)(1).
---------------------------------------------------------------------------
Reporting requirement
      The Secretary is directed to require reporting (at the 
time in the manner determined by the Secretary) necessary to 
carry out the purposes of the provision. The penalties 
otherwise applicable to a failure to report to partners under 
section 6031(b) apply to failure to report under this 
requirement.
Regulatory authority
      The Treasury Department is directed to issue regulations 
or other guidance necessary to carry out the provision. Such 
guidance is to address prevention of the abuse of the purposes 
of the provision, including through the allocation of income to 
tax-indifferent parties. Guidance is also to provide for the 
application of the provision in the case of tiered structures 
of entities.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is generally the same as the House 
bill, except with respect to the nonapplicability of section 
83. Under the Senate amendment, the provision provides a three-
year holding period in the case of certain net long-term 
capital gain with respect to any applicable partnership 
interest held by the taxpayer, notwithstanding the rules of 
section 83 or any election in effect under section 83(b).

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment. 
The conferees wish to clarify the interaction of section 83 
with the provision's three-year holding requirement, which 
applies notwithstanding the rules of section 83 or any election 
in effect under section 83(b). Under the provision, the fact 
that an individual may have included an amount in income upon 
acquisition of the applicable partnership interest, or that an 
individual may have made a section 83(b) election with respect 
to an applicable partnership interest, does not change the 
three-year holding period requirement for long-term capital 
gain treatment with respect to the applicable partnership 
interest. Thus, the provision treats as short-term capital gain 
taxed at ordinary income rates the amount of the taxpayer's net 
long-term capital gain with respect to an applicable 
partnership interest for the taxable year that exceeds the 
amount of such gain calculated as if a three-year (not one-
year) holding period applies. In making this calculation, the 
provision takes account of long-term capital losses calculated 
as if a three-year holding period applies.
16. Amortization of research and experimental expenditures (sec. 3315 
        of the House bill, sec. 13206 of the Senate amendment, and sec. 
        174 of the Code)

                              PRESENT LAW

      Business expenses associated with the development or 
creation of an asset having a useful life extending beyond the 
current year generally must be capitalized and depreciated over 
such useful life.\835\ Taxpayers, however, may elect to deduct 
currently the amount of certain reasonable research or 
experimentation expenditures paid or incurred in connection 
with a trade or business.\836\ Taxpayers may choose to forgo a 
current deduction, capitalize their research expenditures, and 
recover them ratably over the useful life of the research, but 
in no case over a period of less than 60 months.\837\ 
Taxpayers, alternatively, may elect to amortize their research 
expenditures over a period of 10 years.\838\ Research and 
experimental expenditures deductible under section 174 are not 
subject to capitalization under either section 263(a)\839\ or 
section 263A.\840\
---------------------------------------------------------------------------
    \835\Secs. 167 and 263(a).
    \836\Secs. 174(a) and (e).
    \837\Sec. 174(b). Taxpayers generating significant short-term 
losses often choose to defer the deduction for their research and 
experimentation expenditures under this section. Additionally, section 
174 amounts are excluded from the definition of ``start-up 
expenditures'' under section 195 (section 195 generally provides that 
start-up expenditures in excess of $5,000 either are not deductible or 
are amortizable over a period of not less than 180 months once an 
active trade or business begins). So as not to generate significant 
losses before beginning their trade or business, a taxpayer may choose 
to defer the deduction and amortize its section 174 costs beginning 
with the month in which the taxpayer first realizes benefits from the 
expenditures.
    \838\Secs. 174(f)(2) and 59(e). This special 10-year election is 
available to mitigate the effect of the alternative minimum tax 
adjustment for research expenditures set forth in section 56(b)(2). 
Taxpayers with significant losses also may elect to amortize their 
otherwise deductible research and experimentation expenditures to 
reduce amounts that could be subject to expiration under the net 
operating loss carryforward regime.
    \839\Sec. 263(a)(1)(B).
    \840\Sec. 263A(c)(2).
---------------------------------------------------------------------------
      Amounts defined as research or experimental expenditures 
under section 174 generally include all costs incurred in the 
experimental or laboratory sense related to the development or 
improvement of a product.\841\ In particular, qualifying costs 
are those incurred for activities intended to discover 
information that would eliminate uncertainty concerning the 
development or improvement of a product.\842\ Uncertainty 
exists when information available to the taxpayer is not 
sufficient to ascertain the capability or method for 
developing, improving, and/or appropriately designing the 
product.\843\ The determination of whether expenditures qualify 
as deductible research expenses depends on the nature of the 
activity to which the costs relate, not the nature of the 
product or improvement being developed or the level of 
technological advancement the product or improvement 
represents. Examples of qualifying costs include salaries for 
those engaged in research or experimentation efforts, amounts 
incurred to operate and maintain research facilities (e.g., 
utilities, depreciation, rent), and expenditures for materials 
and supplies used and consumed in the course of research or 
experimentation (including amounts incurred in conducting 
trials).\844\ In addition, under administrative guidance, the 
costs of developing computer software have been accorded 
treatment similar to research expenditures.\845\
---------------------------------------------------------------------------
    \841\Treas. Reg. sec. 1.174-2(a)(1) and (2). Product is defined to 
include any pilot model, process, formula, invention, technique, 
patent, or similar property, and includes products to be used by the 
taxpayer in its trade or business as well as products to be held for 
sale, lease, or license. Treas. Reg. sec. 1.174-2(a)(11), Example 10, 
provides an example of new process development costs eligible for 
section 174 treatment.
    \842\Treas. Reg. sec. 1.174-2(a)(1).
    \843\Ibid.
    \844\See Treas. Reg. sec. 1.174-4(c). The definition of research 
and experimental expenditures also includes the costs of obtaining a 
patent, such as attorneys' fees incurred in making and perfecting a 
patent. Treas. Reg. sec. 1.174-2(a)(1).
    \845\Rev. Proc. 2000-50, 2000-2 C.B. 601.
---------------------------------------------------------------------------
      Research or experimental expenditures under section 174 
do not include expenditures for quality control testing; 
efficiency surveys; management studies; consumer surveys; 
advertising or promotions; the acquisition of another's patent, 
model, production or process; or research in connection with 
literary, historical, or similar projects.\846\ For purposes of 
section 174, quality control testing means testing to determine 
whether particular units of materials or products conform to 
specified parameters, but does not include testing to determine 
if the design of the product is appropriate.\847\
---------------------------------------------------------------------------
    \846\Treas. Reg. sec. 1.174-2(a)(6).
    \847\Treas. Reg. sec. 1.174-2(a)(7).
---------------------------------------------------------------------------
      Generally, no current deduction under section 174 is 
allowable for expenditures for the acquisition or improvement 
of land or of depreciable or depletable property used in 
connection with any research or experimentation.\848\ In 
addition, no current deduction is allowed for research expenses 
incurred for the purpose of ascertaining the existence, 
location, extent, or quality of any deposit of ore or other 
mineral, including oil and gas.\849\
---------------------------------------------------------------------------
    \848\Sec. 174(c).
    \849\Sec. 174(d). Special rules apply with respect to geological 
and geophysical costs (section 167(h)), qualified tertiary injectant 
expenses (section 193), intangible drilling costs (sections 263(c) and 
291(b)), and mining exploration and development costs (sections 616 and 
617).
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the provision, amounts defined as specified 
research or experimental expenditures are required to be 
capitalized and amortized ratably over a five-year period, 
beginning with the midpoint of the taxable year in which the 
specified research or experimental expenditures were paid or 
incurred. Specified research or experimental expenditures which 
are attributable to research that is conducted outside of the 
United States\850\ are required to be capitalized and amortized 
ratably over a period of 15 years, beginning with the midpoint 
of the taxable year in which such expenditures were paid or 
incurred. Specified research or experimental expenditures 
subject to capitalization include expenditures for software 
development.
---------------------------------------------------------------------------
    \850\For this purpose, the term ``United States'' includes the 
United States, the Commonwealth of Puerto Rico, and any possession of 
the United States.
---------------------------------------------------------------------------
      Specified research or experimental expenditures do not 
include expenditures for land or for depreciable or depletable 
property used in connection with the research or 
experimentation, but do include the depreciation and depletion 
allowances of such property. Also excluded are exploration 
expenditures incurred for ore or other minerals (including oil 
and gas).
      In the case of retired, abandoned, or disposed property 
with respect to which specified research or experimental 
expenditures are paid or incurred, any remaining basis may not 
be recovered in the year of retirement, abandonment, or 
disposal, but instead must continue to be amortized over the 
remaining amortization period.
      As part of the repeal of the alternative minimum tax, 
taxpayers may no longer elect to amortize their research or 
experimental expenditures over a period of 10 years.\851\
---------------------------------------------------------------------------
    \851\See section 2001 of the House bill (Repeal of alternative 
minimum tax).
---------------------------------------------------------------------------
      Effective date.--The provision applies to amounts paid or 
incurred in taxable years beginning after December 31, 2022.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill, except with 
the following modifications. The application of the Senate 
amendment is treated as a change in the taxpayer's method of 
accounting for purposes of section 481, initiated by the 
taxpayer, and made with the consent of the Secretary. The 
Senate amendment is applied on a cutoff basis to research or 
experimental expenditures paid or incurred in taxable years 
beginning after December 31, 2025 (hence there is no adjustment 
under section 481(a) for research or experimental expenditures 
paid or incurred in taxable years beginning before January 1, 
2026). In addition, the Senate amendment makes conforming 
changes to sections 41 and 280C.
      Effective date.--The provision applies to amounts paid or 
incurred in taxable years beginning after December 31, 2025.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
      Effective date.--The provision applies to amounts paid or 
incurred in taxable years beginning after December 31, 2021.
17. Certain special rules for taxable year of inclusion (sec. 13221 of 
        the Senate amendment and sec. 451 of the Code)

                              PRESENT LAW

In general
      Under section 61(a), gross income generally includes all 
income from whatever source derived, except as otherwise 
provided in Subtitle A of the Code. Thus, gross income 
generally includes income realized in any from, whether in 
money, property, or services, except to the extent provided in 
other sections of the Code.\852\ Once it is determined that an 
item of gross income is clearly realized for Federal income tax 
purposes, section 451 and the regulations thereunder provide 
the general rules as to the timing of when such item is to be 
included in gross income.\853\
---------------------------------------------------------------------------
    \852\Treas. Reg. sec. 1.61-1.
    \853\Treas. Reg. sec. 1.61-1(b)(3).
---------------------------------------------------------------------------
      A taxpayer generally is required to include an item in 
gross income no later than the time of its actual or 
constructive receipt, unless the item properly is accounted for 
in a different period under the taxpayer's method of 
accounting.\854\ If a taxpayer has an unrestricted right to 
demand the payment of an amount, the taxpayer is in 
constructive receipt of that amount whether or not the taxpayer 
makes the demand and actually receives the payment.\855\
---------------------------------------------------------------------------
    \854\Sec. 451(a).
    \855\See Treas. Reg. sec. 1.451-2.
---------------------------------------------------------------------------
      In general, for a cash basis taxpayer, an amount is 
included in gross income when actually or constructively 
received. For an accrual basis taxpayer, an amount is included 
in gross income when all the events have occurred that fix the 
right to receive such income and the amount thereof can be 
determined with reasonable accuracy (i.e., when the ``all 
events test'' is met), unless an exception permits deferral or 
exclusion, or a special method of accounting applies.\856\
---------------------------------------------------------------------------
    \856\See Treas. Reg. secs. 1.446-1(c)(1)(ii) and 1.451-1(a).
---------------------------------------------------------------------------
      A number of exceptions that exist to permit deferral of 
gross income relate to advance payments. An advance payment is 
when a taxpayer receives payment before the taxpayer provides 
goods or services to its customer. The exceptions often allow 
tax deferral to mirror financial accounting deferral (e.g., 
income is recognized as the goods are provided or the services 
are performed).\857\
---------------------------------------------------------------------------
    \857\For examples of provisions permitting deferral of advance 
payments, see Treas. Reg. sec. 1.451-5 and Rev. Proc. 2004-34, 2004-1 
C.B. 991, as modified and clarified by Rev. Proc. 2011-18, 2011-5 
I.R.B. 443, and Rev. Proc. 2013-29, 2013-33 I.R.B. 141.
---------------------------------------------------------------------------
Interest income
      A taxpayer generally must include in gross income the 
amount of interest received or accrued within the taxable year 
on indebtedness held by the taxpayer.\858\
---------------------------------------------------------------------------
    \858\Secs. 61(a)(4) and 451.
---------------------------------------------------------------------------
Original issue discount
      The holder of a debt instrument with original issue 
discount (``OID'') generally accrues and includes the OID in 
gross income as interest over the term of the instrument, 
regardless of when the stated interest (if any) is paid.\859\
---------------------------------------------------------------------------
    \859\Sec. 1272.
---------------------------------------------------------------------------
      The amount of OID with respect to a debt instrument is 
the excess of the stated redemption price at maturity over the 
issue price of the debt instrument.\860\ The stated redemption 
price at maturity is the sum of all payments provided by the 
debt instrument other than qualified stated interest 
payments.\861\ The holder includes in gross income an amount 
equal to the sum of the daily portions of the OID for each day 
during the taxable year the holder held such debt instrument. 
The daily portion is determined by allocating to each day in 
any accrual period its ratable portion of the increase during 
such accrual period in the adjusted issue price of the debt 
instrument.\862\ The adjustment to the issue price is 
determined by multiplying the adjusted issue price (i.e., the 
issue price increased by adjustments prior to the accrual 
period) by the instrument's yield to maturity, and then 
subtracting the interest payable during the accrual period. 
Thus, to compute the amount of OID and the portion of OID 
allocable to a period, the stated redemption price at maturity 
and the term must be known. Issuers of OID instruments accrue 
and deduct the amount of OID as interest expense in the same 
manner as the holder.\863\
---------------------------------------------------------------------------
    \860\Sec. 1273(a)(1).
    \861\Sec. 1273(a)(2) and Treas. Reg. sec. 1.1273-1(b).
    \862\Sec. 1272(a)(1) and (3).
    \863\Sec. 163(e).
---------------------------------------------------------------------------
Debt instruments subject to acceleration
      Special rules for determining the amount of OID allocated 
to a period apply to certain instruments that may be subject to 
prepayment. If a borrower can reduce the yield on a debt by 
exercising a prepayment option, the OID rules assume that the 
borrower will prepay the debt.\864\ In addition, in the case of 
(1) any regular interest in a real estate mortgage investment 
conduit (``REMIC'') or qualified mortgages held by a REMIC or 
(2) any other debt instrument if payments under the instrument 
may be accelerated by reason of prepayments of other 
obligations securing the instrument, the daily portions of the 
OID on such debt instruments are determined by taking into 
account an assumption regarding the prepayment of principal for 
such instruments.\865\
---------------------------------------------------------------------------
    \864\Treas. Reg. sec. 1.1272-1(c)(5).
    \865\Sec. 1272(a)(6).
---------------------------------------------------------------------------
      The Taxpayer Relief Act of 1997\866\ extended these rules 
to any pool of debt instruments the payments on which may be 
accelerated by reason of prepayments.\867\ Thus, if a taxpayer 
holds a pool of credit card receivables that require interest 
to be paid only if the borrowers do not pay their accounts by a 
specified date (``grace-period interest''), the taxpayer is 
required to accrue interest or OID on such pool based upon a 
reasonable assumption regarding the timing of the payments of 
the accounts in the pool. Under these rules, certain amounts 
(other than grace-period interest) related to credit card 
transactions, such as late-payment fees,\868\ cash-advance 
fees,\869\ and interchange fees,\870\ have been determined to 
create OID or increase the amount of OID on the pool of credit 
card receivables to which the amounts relate.\871\
---------------------------------------------------------------------------
    \866\Pub. L. No. 105-34, sec. 1004(a).
    \867\Sec. 1272(a)(6)(C)(iii).
    \868\Rev. Proc. 2004-33, 2004-1 C.B. 989.
    \869\Rev. Proc. 2005-47, 2005-2 C.B. 269.
    \870\Capital One Financial Corp. and Subsidiaries v. Commissioner, 
133 T.C. No. 8 (2009); IRS Chief Counsel Notice CC-2010-018, September 
27, 2010.
    \871\See also Rev. Proc. 2013-26, 2013-22 I.R.B. 1160, for a safe 
harbor method of accounting for OID on a pool of credit card 
receivables for purposes of section 1272(a)(6).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision revises the rules associated with the 
timing of the recognition of income.\872\ Specifically, the 
provision requires an accrual method taxpayer subject to the 
all events test for an item of gross income to recognize such 
income no later than the taxable year in which such income is 
taken into account as revenue in an applicable financial 
statement\873\ or another financial statement under rules 
specified by the Secretary, but provides an exception for 
taxpayers without an applicable or other specified financial 
statement.\874\ In the case of a contract which contains 
multiple performance obligations, the provision allows the 
taxpayer to allocate the transaction price in accordance with 
the allocation made in the taxpayer's applicable financial 
statement.
---------------------------------------------------------------------------
    \872\The provision does not revise the rules associated with when 
an item is realized for Federal income tax purposes and, accordingly, 
does not require the recognition of income in situations where the 
Federal income tax realization event has not yet occurred. For example, 
the provision does not require the recharacterization of a transaction 
from sale to lease, or vice versa, to conform to how the transaction is 
reported in the taxpayer's applicable financial statement. Similarly, 
the provision does not require the recognition of gain or loss from 
securities that are marked to market for financial reporting purposes 
if the gain or loss from such investments is not realized for Federal 
income tax purposes until such time that the taxpayer sells or 
otherwise disposes of the investment. As a further example, income from 
investments in corporations or partnerships that are accounted for 
under the equity method for financial reporting purposes will not 
result in the recognition of income for Federal income tax purposes 
until such time that the Federal income tax realization even has 
occurred (e.g., when the taxpayer receives a dividend from the 
corporation in which it owns less than a controlling interest or when 
the taxpayer receives its allocable share of income, deductions, gains, 
and losses on its Schedule K-1 from the partnership).
    \873\For purposes of the provision, the term ``applicable financial 
statement'' means: (A) a financial statement which is certified as 
being prepared in accordance with generally accepted accounting 
principles and which is (i) a 10-K (or successor form), or annual 
statement to shareholders, required to be filed by the taxpayer with 
the United States Securities and Exchange Commission (``SEC''), (ii) an 
audited financial statement of the taxpayer which is used for (I) 
credit purposes, (II) reporting to shareholders, partners, or other 
proprietors, or to beneficiaries, or (III) any other substantial nontax 
purpose, but only if there is no statement of the taxpayer described in 
clause (i), or (iii) filed by the taxpayer with any other Federal 
agency for purposes other than Federal tax purposes, but only if there 
is no statement of the taxpayer described in clause (i) or (ii); (B) a 
financial statement which is made on the basis of international 
financial reporting standards and is filed by the taxpayer with an 
agency of a foreign government which is equivalent to the SEC and which 
has reporting standards not less stringent than the standards required 
by such Commission, but only if there is no statement of the taxpayer 
described in subparagraph (A); or (C) a financial statement filed by 
the taxpayer with any other regulatory or governmental body specified 
by the Secretary, but only if there is no statement of the taxpayer 
described in subparagraph (A) or (B). If the financial results of a 
taxpayer are reported on the applicable financial statement for a group 
of entities, such statement is treated as the applicable financial 
statement of the taxpayer.
    \874\The Committee intends that the provision apply to items of 
gross income for which the timing of income inclusion is determined 
using the all events test under present law. Under the provision, an 
accrual method taxpayer with an applicable financial statement will 
include an item in income under section 451 upon the earlier of when 
the all events test is met or when the taxpayer includes such item in 
revenue in an applicable financial statement. For example, under the 
provision, any unbilled receivables for partially performed services 
must be recognized to the extent the amounts are taken into income for 
financial statement purposes. However, accrual method taxpayers without 
an applicable or other specified financial statement will continue to 
determine income inclusion under the all events test, unless an 
exception permits deferral or exclusion. See sec. 451(a) and Treas. 
Reg. sec. 1.451-1(a). The Committee intends that the financial 
statement conformity requirement added to section 451 not be construed 
as preventing the use of special methods of accounting provided 
elsewhere in the Code, other than part V of subchapter P (special rules 
for bonds and other debt instruments) excluding items of gross income 
in connection with a mortgage servicing contract. For example, it does 
not preclude the use of the installment method under section 453 or the 
use of long-term contract methods under section 460. See Treas. Reg. 
sec. 1.446-1(c)(1)(iii).
---------------------------------------------------------------------------
      In addition, the provision directs accrual method 
taxpayers with an applicable financial statement to apply the 
income recognition rules under section 451 before applying the 
special rules under part V of subchapter P, which, in addition 
to the OID rules, also includes rules regarding the treatment 
of market discount on bonds, discounts on short-term 
obligations, OID on tax-exempt bonds, and stripped bonds and 
stripped coupons.\875\ Thus, for example, to the extent amounts 
are included in revenue for financial statement purposes when 
received (e.g., late-payment fees, cash-advance fees, or 
interchange fees), such amounts generally are includable in 
income at such time in accordance with the general recognition 
principles under section 451. The provision provides an 
exception for any item of gross income in connection with a 
mortgage servicing contract. Thus, under the provision, income 
from mortgage servicing rights will continue to be recognized 
in accordance with the present law rules for such items of 
gross income (i.e., ``normal'' mortgage servicing rights will 
be included in income upon the earlier of earned or received 
under the all events test of section 451 (i.e., not averaged 
over the life of the mortgage),\876\ and ``excess'' mortgage 
servicing rights will be treated as stripped coupons under 
section 1286 and therefore subject to the original issue 
discount rules\877\).
---------------------------------------------------------------------------
    \875\Secs. 1271-1288.
    \876\See Rev. Rul. 70-142, 1970-2 C.B. 115.
    \877\See Rev. Rul. 91-46, 1991-2, C.B. 358, and Rev. Proc. 91-50, 
1991-2 C.B. 778.
---------------------------------------------------------------------------
      The provision also codifies the current deferral method 
of accounting for advance payments for goods, services, and 
other specified items provided by the IRS under Revenue 
Procedure 2004-34.\878\ That is, the provision allows accrual 
method taxpayers to elect\879\ to defer the inclusion of income 
associated with certain advance payments to the end of the tax 
year following the tax year of receipt if such income also is 
deferred for financial statement purposes.\880\ In the case of 
advance payments received for a combination of services, goods, 
or other specified items, the provision allows the taxpayer to 
allocate the transaction price in accordance with the 
allocation made in the taxpayer's applicable financial 
statement. The provision requires the inclusion in gross income 
of a deferred advance payment if the taxpayer ceases to exist.
---------------------------------------------------------------------------
    \878\2004-1 C.B. 991, as modified and clarified by Rev. Proc. 2011-
18, 2011-5 I.R.B. 443, and Rev. Proc. 2013-29, 2013-33 I.R.B. 141.
    \879\The election shall be made at such time, in such form and 
manner, and with respect to such categories of advance payments as the 
Secretary may provide. For these purposes, the recognition of income 
under such election is treated as a method of accounting.
    \880\Thus, the provision is intended to override any deferral 
method provided by Treasury Regulation section 1.451-5 for advance 
payments received for goods.
---------------------------------------------------------------------------
      The application of these rules is a change in the 
taxpayer's method of accounting for purposes of section 481. In 
the case of any taxpayer required by this provision to change 
its method of accounting for its first taxable year beginning 
after December 31, 2017, such change is treated as initiated by 
the taxpayer and made with the consent of the Secretary. In the 
case of income from a debt instrument having OID, the related 
section 481(a) adjustment is taken into account over six 
taxable years.
      Effective date.--The provision generally applies to 
taxable years beginning after December 31, 2017. In the case of 
income from a debt instrument having OID, the provision applies 
to taxable years beginning after December 31, 2018.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
18. Denial of deduction for certain fines, penalties, and other amounts 
        (sec. 13306 of the Senate amendment and sec. 162(f) and new 
        sec. 6050X of the Code)

                              PRESENT LAW

      The Code denies a deduction for fines or penalties paid 
to a government for the violation of any law.\881\
---------------------------------------------------------------------------
    \881\Sec. 162(f).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision denies deductibility for any otherwise 
deductible amount paid or incurred (whether by suit, agreement, 
or otherwise) to or at the direction of a government or 
specified nongovernmental entity in relation to the violation 
of any law or the investigation or inquiry by such government 
or entity into the potential violation of any law. An exception 
applies to payments that the taxpayer establishes are either 
restitution (including remediation of property) or amounts 
required to come into compliance with any law that was violated 
or involved in the investigation or inquiry, that are 
identified in the court order or settlement agreement as 
restitution, remediation, or required to come into compliance. 
In the case of any amount of restitution for failure to pay any 
tax and assessed as restitution under the Code, such 
restitution is deductible only to the extent it would have been 
allowed as a deduction if it had been timely paid. The IRS 
remains free to challenge the characterization of an amount so 
identified; however, no deduction is allowed unless the 
identification is made. Restitution or included remediation of 
property does not include reimbursement of government 
investigative or litigation costs.
      The provision applies only where a government (or other 
entity treated in a manner similar to a government under the 
provision) is a complainant or investigator with respect to the 
violation or potential violation of any law.\882\ An exception 
also applies to any amount paid or incurred as taxes due.
---------------------------------------------------------------------------
    \882\Thus, for example, the provision does not apply to payments 
made by one private party to another in a lawsuit between private 
parties, merely because a judge or jury acting in the capacity as a 
court directs the payment to be made. The mere fact that a court enters 
a judgment or directs a result in a private dispute does not cause the 
payment to be made ``at the direction of a government'' for purposes of 
the provision.
---------------------------------------------------------------------------
      The provision requires government agencies (or entities 
treated as such agencies under the provision) to report to the 
IRS and to the taxpayer the amount of each settlement agreement 
or order entered into where the aggregate amount required to be 
paid or incurred to or at the direction of the government is at 
least $600 (or such other amount as may be specified by the 
Secretary of the Treasury as necessary to ensure the efficient 
administration of the Internal Revenue laws). The report must 
separately identify any amounts that are for restitution or 
remediation of property, or correction of noncompliance. The 
report must be made at the time the agreement is entered into, 
as determined by the Secretary of the Treasury.
      Effective date.--The provision denying the deduction and 
the reporting provision are effective for amounts paid or 
incurred on or after the date of enactment, except that it 
would not apply to amounts paid or incurred under any binding 
order or agreement entered into before such date. Such 
exception does not apply to an order or agreement requiring 
court approval unless the approval was obtained before such 
date.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
19. Denial of deduction for settlements subject to nondisclosure 
        agreements paid in connection with sexual harassment or sexual 
        abuse (sec. 13307 of the Senate amendment and new sec. 162(q) 
        of the Code)

                              PRESENT LAW

      A taxpayer generally is allowed a deduction for ordinary 
and necessary expenses paid or incurred in carrying on any 
trade or business.\883\ However, certain exceptions apply. No 
deduction is allowed for (1) any charitable contribution or 
gift that would be allowable as a deduction under section 170 
were it not for the percentage limitations, the dollar 
limitations, or the requirements as to the time of payment, set 
forth in such section; (2) any illegal bribe, illegal kickback, 
or other illegal payment; (3) certain lobbying and political 
expenditures; (4) any fine or similar penalty paid to a 
government for the violation of any law; (5) two-thirds of 
treble damage payments under the antitrust laws; (6) certain 
foreign advertising expenses; (7) certain amounts paid or 
incurred by a corporation in connection with the reacquisition 
of its stock or of the stock of any related person; or (8) 
certain applicable employee remuneration.
---------------------------------------------------------------------------
    \883\Sec. 162(a).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the provision, no deduction is allowed for any 
settlement, payout, or attorney fees related to sexual 
harassment or sexual abuse if such payments are subject to a 
nondisclosure agreement.
      Effective date.--The provision is effective for amounts 
paid or incurred after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
20. Uniform treatment of expenses in contingency fee cases (sec. 3316 
        of the House bill and new sec. 162(q) of the Code)

                              PRESENT LAW

      The Code provides that a taxpayer may deduct all ordinary 
and necessary expenses paid or incurred during the taxable year 
in carrying on a trade or business.\884\
---------------------------------------------------------------------------
    \884\Sec. 162(a); Treas. Reg. sec. 1.162-1(a).
---------------------------------------------------------------------------
      A current deduction for an expense for which there is a 
right or expectation of reimbursement may be disallowed because 
these payments are not expenses of the taxpayer and are instead 
in the nature of an advance or a loan. The extent to which the 
right must be established has varied. Some cases have denied 
the current deduction because the right of reimbursement was 
fixed,\885\ others have allowed the current deduction because 
the right of reimbursement was uncertain,\886\ and other cases 
have denied the current deduction if the taxpayer's right to 
reimbursement was subject to a contingency.
---------------------------------------------------------------------------
    \885\Charles Baloian Company, Inc. v. Commissioner, 68 T.C. 620, 
626, 628 (1977); Manocchio v. Commissioner, 710 F.2d 1400, 1402 (9th 
Cir. 1983); Glendinning, McLeish & Co. v. Commissioner, 61 F.2d 950, 
952 (2d Cir. 1932); Webbe v. Commissioner, T.C. Memo. 1987-426, aff'd, 
902 F.2d 688 (8th Cir. 1990).
    \886\George K. Herman Chevrolet, Inc. v. Commissioner, 39 T.C. 846, 
853 (1963); Allegheny Corporation v. Commissioner, 28 T.C. 298, 305 
(1957), acq., 1957-2 C.B. 3; Electric Tachometer Corporation v. 
Commissioner, 37 T.C. 158, 161-162 (1961), acq., 1962-2 C.B. 4.
---------------------------------------------------------------------------
      Courts have held that an attorney representing clients on 
a contingent fee basis may not currently deduct advances to or 
expenses paid on behalf of the clients as ordinary and 
necessary business expenses.\887\ The amounts in these cases 
were to be repaid from any recovery. Courts have also held that 
even if reimbursement is due only under certain circumstances, 
generally no immediate deduction is allowable.\888\
---------------------------------------------------------------------------
    \887\Burnett v. Commissioner, 356 F.2d 755, 760 (5th Cir.), cert. 
denied, 385 U.S. 832 (1966); Herrick v. Commissioner, 63 T.C. 562, 567, 
568 (1975); Canelo v. Commissioner, 53 T.C. 217, 225 (1969), aff'd, 447 
F.2d 484 (9th Cir. 1971), acq. 1971-2 C.B. 2, nonacq. in part, 1982-2 
C.B. 2; Silverton v. Commissioner, T.C. Memo. 1977-198, aff'd, 647 F.2d 
172 (9th Cir.), cert. denied, 454 U.S. 1033 (1981); Watts v. 
Commissioner, T.C. Memo. 1968-183.
    \888\Boccardo v. Commissioner, 12 Cl Ct. 184 (1987); Boccardo v. 
Commissioner, 65 T.C.M. 2739 (1993).
---------------------------------------------------------------------------
      However, the Ninth Circuit reached the opposite 
conclusion and held that attorneys who represent clients in 
``gross fee'' contingency fee cases are not extending loans to 
clients and therefore may treat litigation costs, such as court 
fees and witness expenses, as deductible business expenses 
under the Code.\889\ The IRS does not follow this decision, 
except in the Ninth Circuit, based on the fact that amounts 
advanced by attorneys will be reimbursed by the client and 
therefore are not deductible business expenses.\890\
---------------------------------------------------------------------------
    \889\Boccardo v. Commissioner, 56 F.3d 1016 (9th Cir. 1995), rev'g 
65 T.C.M. 2739 (1993).
    \890\1997 FSA LEXIS 442 (June 2, 1997).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision denies attorneys an otherwise-allowable 
deduction for litigation costs paid under arrangements that are 
primarily on a contingent fee basis until the contingency ends.
      The provision effects a legislative override of the 
opinion in the Ninth Circuit Court of Appeals in Boccardo v. 
Commissioner, 56 F.3d 1016 (9th Cir. 1995). No inference 
regarding the tax treatment of these costs under present law is 
intended.
      Effective date.--The provision applies to expenses and 
costs paid or incurred in taxable years beginning after the 
date of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.

                     E. Reform of Business Credits

1. Repeal of credit for clinical testing expenses for certain drugs for 
        rare diseases or conditions (sec. 3401 of the House bill, sec. 
        13401 of the Senate amendment, and sec. 45C of the Code)

                              PRESENT LAW

      Section 45C provides a 50-percent business tax credit for 
qualified clinical testing expenses incurred in testing of 
certain drugs for rare diseases or conditions, generally 
referred to as ``orphan drugs.'' Qualified clinical testing 
expenses are costs incurred to test an orphan drug after the 
drug has been approved for human testing by the Food and Drug 
Administration (``FDA'') but before the drug has been approved 
for sale by the FDA.\891\ A rare disease or condition is 
defined as one that (1) affects fewer than 200,000 persons in 
the United States, or (2) affects more than 200,000 persons, 
but for which there is no reasonable expectation that 
businesses could recoup the costs of developing a drug for such 
disease or condition from sales in the United States of the 
drug.\892\
---------------------------------------------------------------------------
    \891\Sec. 45C(b).
    \892\Sec. 45C(d).
---------------------------------------------------------------------------
      Amounts included in computing the credit under this 
section are excluded from the computation of the research 
credit under section 41.\893\
---------------------------------------------------------------------------
    \893\Sec. 45C(c).
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill repeals the credit for qualified clinical 
testing expenses.
      Effective date.--The provision applies to amounts paid or 
incurred in taxable years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment reduces the credit rate to 27.5 
percent of qualified clinical testing expenses.
      Effective date.--The provision applies to amounts paid or 
incurred in taxable years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
but reduces the credit rate to 25 percent of qualified clinical 
testing expenses.
2. Repeal of employer-provided child care credit (sec. 3402 of the 
        House bill and sec. 42F of the Code)

                              PRESENT LAW

      Taxpayers are eligible for a tax credit equal to 25 
percent of qualified expenditures for employee child care and 
10 percent of qualified expenditures for child care resource 
and referral services. The maximum total credit that may be 
claimed by a taxpayer may not exceed $150,000 per taxable year. 
The credit is part of the general business credit.\894\
---------------------------------------------------------------------------
    \894\Sec. 38(b)(15).
---------------------------------------------------------------------------
      Qualified child care expenditures generally include costs 
paid or incurred: (1) to acquire, construct, rehabilitate or 
expand property that is to be used as part of the taxpayer's 
qualified child care facility;\895\ (2) for the operation of 
the taxpayer's qualified child care facility, including the 
costs of training and certain compensation for employees of the 
child care facility, and scholarship programs; or (3) under a 
contract with a qualified child care facility to provide child 
care services to employees of the taxpayer. To be a qualified 
child care facility, the principal use of the facility must be 
for child care (unless it is the principal residence of the 
taxpayer), and the facility must meet all applicable State and 
local laws and regulations, including any licensing laws.
---------------------------------------------------------------------------
    \895\In addition, a depreciation deduction (or amortization in lieu 
of depreciation) must be allowable with respect to the property and the 
property must not be part of the principal residence of the taxpayer or 
any employee of the taxpayer.
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      Qualified child care expenditures for resource and 
referral services include amounts paid under contract to 
provide child care resource and referral services to a 
taxpayer's employees.

                               HOUSE BILL

      The House bill repeals the credit for qualified child 
care expenditures and qualified child care expenditures for 
resource and referral services.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The Conference agreement does not follow the House bill 
provision.
3. Rehabilitation credit (sec. 3403 of the House bill, sec. 13402 of 
        the Senate amendment, and sec. 47 of the Code)

                              PRESENT LAW

      Section 47 provides a two-tier tax credit for 
rehabilitation expenditures.
      A 20-percent credit is provided for qualified 
rehabilitation expenditures with respect to a certified 
historic structure. For this purpose, a certified historic 
structure means any building that is listed in the National 
Register, or that is located in a registered historic district 
and is certified by the Secretary of the Interior to the 
Secretary of the Treasury as being of historic significance to 
the district.
      A 10-percent credit is provided for qualified 
rehabilitation expenditures with respect to a qualified 
rehabilitated building, which generally means a building that 
was first placed in service before 1936. A pre-1936 building 
must meet requirements with respect to retention of existing 
external walls and internal structural framework of the 
building in order for expenditures with respect to it to 
qualify for the 10-percent credit. A building is treated as 
having met the substantial rehabilitation requirement under the 
10-percent credit only if the rehabilitation expenditures 
during the 24-month period selected by the taxpayer and ending 
within the taxable year exceed the greater of (1) the adjusted 
basis of the building (and its structural components), or (2) 
$5,000.
      The provision requires the use of straight-line 
depreciation or the alternative depreciation system in order 
for rehabilitation expenditures to be treated as qualified 
under the provision.

                               HOUSE BILL

      The House bill repeals the rehabilitation credit.
      Effective date.--The provision applies to amounts paid or 
incurred after December 31, 2017. A transition rule provides 
that in the case of qualified rehabilitation expenditures 
(within the meaning of present law), with respect to any 
building owned or leased by the taxpayer at all times on and 
after January 1, 2018, the 24-month period selected by the 
taxpayer (under section 47(c)(1)(C)) is to begin not later than 
the end of the 180-day period beginning on the date of the 
enactment of the Act, and the amendments made by the provision 
apply to such expenditures paid or incurred after the end of 
the taxable year in which such 24-month period ends.

                            SENATE AMENDMENT

      The Senate amendment repeals the 10-percent credit for 
pre-1936 buildings. The provision retains the 20-percent credit 
for qualified rehabilitation expenditures with respect to a 
certified historic structure, with a modification. Under the 
provision, the credit allowable for a taxable year during the 
five-year period beginning in the taxable year in which the 
qualified rehabilitated building is placed in service is an 
amount equal to the ratable share. The ratable share for a 
taxable year during the five-year period is amount equal to 20 
percent of the qualified rehabilitation expenditures for the 
building, as allocated ratably to each taxable year during the 
five-year period. It is intended that the sum of the ratable 
shares for the taxable years during the five-year period does 
not exceed 100 percent of the credit for qualified 
rehabilitation expenditures for the qualified rehabilitated 
building.
      Effective date.--The provision applies to amounts paid or 
incurred after December 31, 2017. A transition rule provides 
that in the case of qualified rehabilitation expenditures (for 
a pre-1936 building) with respect to any building owned or 
leased (as provided under present law) by the taxpayer at all 
times on and after January 1, 2018, the 24-month period 
selected by the taxpayer (under section 47(c)(1)(C)) is to 
begin not later than the end of the 180-day period beginning on 
the date of the enactment of the Act, and the amendments made 
by the provision apply to such expenditures paid or incurred 
after the end of the taxable year in which such 24-month period 
ends.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with a modification to the transition rule under the effective 
date relating to qualified rehabilitation expenditures under 
certain phased rehabilitations for which the taxpayer may 
select a 60-month period.
      Effective date.--The provision applies to amounts paid or 
incurred after December 31, 2017. A transition rule provides 
that in the case of qualified rehabilitation expenditures (for 
either a certified historic structure or a pre-1936 building), 
with respect to any building owned or leased (as provided under 
present law) by the taxpayer at all times on and after January 
1, 2018, the 24-month period selected by the taxpayer (section 
47(c)(1)(C)(i)), or the 60-month period selected by the 
taxpayer under the rule for phased rehabilitation (section 
47(c)(1)(C)(ii)), is to begin not later than the end of the 
180-day period beginning on the date of the enactment of the 
Act, and the amendments made by the provision apply to such 
expenditures paid or incurred after the end of the taxable year 
in which such 24-month or 60-month period ends.
4. Repeal of work opportunity tax credit (sec. 3404 of the House bill 
        and sec. 51 of the Code)

                              PRESENT LAW

In general
      The work opportunity tax credit is available on an 
elective basis for employers hiring individuals from one or 
more of ten targeted groups. The amount of the credit available 
to an employer is determined by the amount of qualified wages 
paid by the employer. Generally, qualified wages consist of 
wages attributable to services rendered by a member of a 
targeted group during the one-year period beginning with the 
day the individual begins work for the employer (two years in 
the case of an individual in the long-term family assistance 
recipient category).
Targeted groups eligible for the credit
      Generally, an employer is eligible for the credit only 
for qualified wages paid to members of a targeted group. These 
targeted groups are: (1) Families receiving TANF; (2) Qualified 
veterans; (3) Qualified ex-felons; (4) Designated community 
residents; (5) Vocational rehabilitation referrals; (6) 
Qualified summer youth employees; (7) Qualified food and 
nutrition recipients; (8) Qualified SSI recipients; (9) Long-
term family assistance recipients; and (10) Qualified long-term 
unemployment recipients.
Qualified wages
      Generally, qualified wages are defined as cash wages paid 
by the employer to a member of a targeted group. The employer's 
deduction for wages is reduced by the amount of the credit.
      For purposes of the credit, generally, wages are defined 
by reference to the FUTA definition of wages contained in 
section 3306(b) (without regard to the dollar limitation 
therein contained). Special rules apply in the case of certain 
agricultural labor and certain railroad labor.
Calculation of the credit
      The credit available to an employer for qualified wages 
paid to members of all targeted groups (except for long-term 
family assistance recipients and qualified veterans) equals 40 
percent (25 percent for employment of 400 hours or less) of 
qualified first-year wages. Generally, qualified first-year 
wages are qualified wages (not in excess of $6,000) 
attributable to service rendered by a member of a targeted 
group during the one-year period beginning with the day the 
individual began work for the employer. Therefore, the maximum 
credit per employee is $2,400 (40 percent of the first $6,000 
of qualified first-year wages). With respect to qualified 
summer youth employees, the maximum credit is $1,200 (40 
percent of the first $3,000 of qualified first-year wages). 
Except for long-term family assistance recipients, no credit is 
allowed for second-year wages.
      In the case of long-term family assistance recipients, 
the credit equals 40 percent (25 percent for employment of 400 
hours or less) of $10,000 for qualified first-year wages and 50 
percent of the first $10,000 of qualified second-year wages. 
Generally, qualified second-year wages are qualified wages (not 
in excess of $10,000) attributable to service rendered by a 
member of the long-term family assistance category during the 
one-year period beginning on the day after the one-year period 
beginning with the day the individual began work for the 
employer. Therefore, the maximum credit per employee is $9,000 
(40 percent of the first $10,000 of qualified first-year wages 
plus 50 percent of the first $10,000 of qualified second-year 
wages).
      In the case of a qualified veterans, the credit is 
calculated as follows: (1) in the case of a qualified veteran 
who was eligible to receive assistance under a supplemental 
nutritional assistance program (for at least a three-month 
period during the year prior to the hiring date) the employer 
is entitled to a maximum credit of 40 percent of $6,000 of 
qualified first-year wages; (2) in the case of a qualified 
veteran who is entitled to compensation for a service connected 
disability, who is hired within one year of discharge, the 
employer is entitled to a maximum credit of 40 percent of 
$12,000 of qualified first-year wages; (3) in the case of a 
qualified veteran who is entitled to compensation for a service 
connected disability, and who has been unemployed for an 
aggregate of at least six months during the one-year period 
ending on the hiring date, the employer is entitled to a 
maximum credit of 40 percent of $24,000 of qualified first-year 
wages; (4) in the case of a qualified veteran unemployed for at 
least four weeks but less than six months (whether or not 
consecutive) during the one-year period ending on the date of 
hiring, the maximum credit equals 40 percent of $6,000 of 
qualified first-year wages; and (5) in the case of a qualified 
veteran unemployed for at least six months (whether or not 
consecutive) during the one-year period ending on the date of 
hiring, the maximum credit equals 40 percent of $14,000 of 
qualified first-year wages.
Expiration
      The work opportunity tax credit is not available with 
respect to wages paid to individuals who begin work for an 
employer after December 31, 2019.

                               HOUSE BILL

      The provision repeals the work opportunity tax credit.
      Effective date.--The provision applies to amounts paid or 
incurred to individuals who begin work for the employer after 
December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
5. Repeal of deduction for certain unused business credits (sec. 3405 
        of the House bill, sec. 13403 of the Senate amendment, and sec. 
        196 of the Code)

                              PRESENT LAW

      The general business credit (``GBC'') consists of various 
individual tax credits allowed with respect to certain 
qualified expenditures and activities.\896\ In general, the 
various individual tax credits contain provisions that prohibit 
``double benefits,'' either by denying deductions in the case 
of expenditure-related credits or by requiring income 
inclusions in the case of activity-related credits. Unused 
credits may be carried back one year and carried forward 20 
years.\897\
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    \896\Sec. 38.
    \897\Sec. 39.
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      Section 196 allows a deduction to the extent that certain 
portions of the GBC expire unused after the end of the carry 
forward period. In general, 100 percent of the unused credit is 
allowed as a deduction in the taxable year after such credit 
expired. However, with respect to the investment credit 
determined under section 46 (other than the rehabilitation 
credit) and the research credit determined under section 41(a) 
(for a taxable year beginning before January 1, 1990), section 
196 limits the deduction to 50 percent of such unused 
credits.\898\
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    \898\Sec. 196(d).
---------------------------------------------------------------------------

                               HOUSE BILL

      This provision repeals the deduction for certain unused 
business credits.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
6. Termination of new markets tax credit (sec. 3406 of the House bill 
        and sec. 45D of the Code)

                              PRESENT LAW

      Section 45D provides a new markets tax credit for 
qualified equity investments made to acquire stock in a 
corporation, or a capital interest in a partnership, that is a 
qualified community development entity (``CDE'').\899\ The 
amount of the credit allowable to the investor (either the 
original purchaser or a subsequent holder) is (1) a five-
percent credit for the year in which the equity interest is 
purchased from the CDE and for each of the following two years, 
and (2) a six-percent credit for each of the following four 
years.\900\ The credit is determined by applying the applicable 
percentage (five or six percent) to the amount paid to the CDE 
for the investment at its original issue, and is available to 
the taxpayer who holds the qualified equity investment on the 
date of the initial investment or on the respective anniversary 
date that occurs during the taxable year.\901\ The credit is 
recaptured if at any time during the seven-year period that 
begins on the date of the original issue of the investment the 
entity (1) ceases to be a qualified CDE, (2) the proceeds of 
the investment cease to be used as required, or (3) the equity 
investment is redeemed.\902\
---------------------------------------------------------------------------
    \899\Section 45D was added by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
    \900\Sec. 45D(a)(2).
    \901\Sec. 45D(a)(3).
    \902\Sec. 45D(g).
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      A qualified CDE is any domestic corporation or 
partnership: (1) whose primary mission is serving or providing 
investment capital for low-income communities or low-income 
persons; (2) that maintains accountability to residents of low-
income communities by their representation on any governing 
board of or any advisory board to the CDE; and (3) that is 
certified by the Secretary as being a qualified CDE.\903\ A 
qualified equity investment means stock (other than 
nonqualified preferred stock) in a corporation or a capital 
interest in a partnership that is acquired at its original 
issue directly (or through an underwriter) from a CDE for cash, 
and includes an investment of a subsequent purchaser if such 
investment was a qualified equity investment in the hands of 
the prior holder.\904\ Substantially all of the investment 
proceeds must be used by the CDE to make qualified low-income 
community investments and the investment must be designated as 
a qualified equity investment by the CDE. For this purpose, 
qualified low-income community investments include: (1) capital 
or equity investments in, or loans to, qualified active low-
income community businesses; (2) certain financial counseling 
and other services to businesses and residents in low-income 
communities; (3) the purchase from another CDE of any loan made 
by such entity that is a qualified low-income community 
investment; or (4) an equity investment in, or loan to, another 
CDE.\905\
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    \903\Sec. 45D(c).
    \904\Sec. 45D(b).
    \905\Sec. 45D(d).
---------------------------------------------------------------------------
      A ``low-income community'' is a population census tract 
with either (1) a poverty rate of at least 20 percent or (2) 
median family income which does not exceed 80 percent of the 
greater of metropolitan area median family income or statewide 
median family income (for a non-metropolitan census tract, does 
not exceed 80 percent of statewide median family income). In 
the case of a population census tract located within a high 
migration rural county, low-income is defined by reference to 
85 percent (as opposed to 80 percent) of statewide median 
family income.\906\ For this purpose, a high migration rural 
county is any county that, during the 20-year period ending 
with the year in which the most recent census was conducted, 
has a net out-migration of inhabitants from the county of at 
least 10 percent of the population of the county at the 
beginning of such period.
---------------------------------------------------------------------------
    \906\Sec. 45D(e).
---------------------------------------------------------------------------
      The Secretary is authorized to designate ``targeted 
populations'' as low-income communities for purposes of the new 
markets tax credit.\907\ For this purpose, a ``targeted 
population'' is defined by reference to section 103(20) of the 
Riegle Community Development and Regulatory Improvement Act of 
1994\908\ (the ``Act'') to mean individuals, or an identifiable 
group of individuals, including an Indian tribe, who are low-
income persons or otherwise lack adequate access to loans or 
equity investments. Section 103(17) of the Act provides that 
``low-income'' means (1) for a targeted population within a 
metropolitan area, less than 80 percent of the area median 
family income; and (2) for a targeted population within a non-
metropolitan area, less than the greater of 80 percent of the 
area median family income or 80 percent of the statewide non-
metropolitan area median family income. A targeted population 
is not required to be within any census tract. In addition, a 
population census tract with a population of less than 2,000 is 
treated as a low-income community for purposes of the credit if 
such tract is within an empowerment zone, the designation of 
which is in effect under section 1391, and is contiguous to one 
or more low-income communities.
---------------------------------------------------------------------------
    \907\Sec. 45D(e)(2).
    \908\Pub. L. No. 103-325.
---------------------------------------------------------------------------
      A qualified active low-income community business is 
defined as a business that satisfies, with respect to a taxable 
year, the following requirements: (1) at least 50 percent of 
the total gross income of the business is derived from the 
active conduct of trade or business activities in any low-
income community; (2) a substantial portion of the tangible 
property of the business is used in a low-income community; (3) 
a substantial portion of the services performed for the 
business by its employees is performed in a low-income 
community; and (4) less than five percent of the average of the 
aggregate unadjusted bases of the property of the business is 
attributable to certain financial property or to certain 
collectibles.\909\
---------------------------------------------------------------------------
    \909\Sec. 45D(d)(2).
---------------------------------------------------------------------------
      The maximum annual amount of qualified equity investments 
is $3.5 billion for calendar years 2010 through 2019. No amount 
of unused allocation limitation may be carried to any calendar 
year after 2024.

                               HOUSE BILL

      This provision provides that the new markets tax credit 
limitation is zero for calendar year 2018 and thereafter and no 
amount of unused allocation limitation may be carried to any 
calendar year after 2022.
      Effective date.--The provision applies to calendar years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
7. Repeal of credit for expenditures to provide access to disabled 
        individuals (sec. 3407 of the House bill and sec. 44 of the 
        Code)

                              PRESENT LAW

      Section 44 provides a 50-percent credit for eligible 
access expenditures paid or incurred by an eligible small 
business for the taxable year. The credit is limited to 
eligible access expenditures exceeding $250 but not exceeding 
10,500. The credit is part of the general business credit.\910\
---------------------------------------------------------------------------
    \910\Sec. 38(b)(17).
---------------------------------------------------------------------------
      Eligible access expenditures generally means amounts paid 
or incurred by an eligible small business to comply with 
requirements under the Americans with Disabilities Act of 
1990.\911\ These expenditures\912\ include: (1) removal of 
architectural, communication, physical or transportation 
barriers which prevent a business from being usable or 
accessible to individuals with disabilities;\913\ (2) provision 
of qualified interpreters or other effective methods of making 
aurally-delivered materials available to individuals with 
hearing impairments; (3) provision of qualified readers, taped 
texts, or other effective methods of making visually-delivered 
materials available to individuals with visual impairments; (4) 
acquisition or modification of equipment or devices for 
individuals with disabilities; or (5) provision of other 
similar services, modifications, materials or equipment.
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    \911\As in effect on November 5, 1990. Sec. 44(c)(1).
    \912\These expenditures must be reasonable and necessary, excluding 
those unnecessary to accomplish listed purposes, and meet standards set 
forth by the Secretary and the Architectural and Transportation 
Barriers Compliance Board. Sec. 44(c)(3) and (5).
    \913\Expenses related to this removal are not eligible in 
connection with facilities placed in service after November 5, 1990. 
Sec. 44(c)(4).
---------------------------------------------------------------------------
      An eligible small business means any person that elects 
application of section 44 and, during the preceding taxable 
year, (1) had gross receipts not exceeding $1,000,000 or (2) 
employed not more than 30 full-time employees.\914\
---------------------------------------------------------------------------
    \914\For this definition, an employee is considered full-time if 
employed at least 30 hours per week for 20 or more calendar weeks in 
the taxable year.
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill repeals the credit for eligible access 
expenditures.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
8. Modification of credit for portion of employer social security taxes 
        paid with respect to employee tips (sec. 3408 of the House bill 
        and sec. 45B of the Code)

                              PRESENT LAW

Credit
      Certain food or beverage establishments may elect to 
claim a business tax credit equal to an employer's taxes under 
the Federal Insurance Contributions Act (``FICA'')\915\ paid on 
tips in excess of those treated as wages for purposes of 
meeting the minimum wage requirements of the Fair Labor 
Standards Act (the ``FLSA'') as in effect on January 1, 
2007.\916\ The credit applies only with respect to FICA taxes 
paid on tips received from customers in connection with the 
providing, delivering, or serving of food or beverages for 
consumption if the tipping of employees delivering or serving 
food or beverages by customers is customary. The credit is 
available whether or not the tips are reported or a percentage 
of gross receipts is allocated (described below). No deduction 
is allowed for any amount taken into account in determining the 
tip credit. A taxpayer may elect not to have the credit apply 
for a taxable year.
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    \915\FICA taxes consist of social security (OASDI, or old age, 
survivor, and disability insurance) and hospital (Medicare) taxes 
imposed on employers and employees with respect to wages paid to 
employees under sections 3101-3128.
    \916\Sec. 45B. As of January 1, 2007, the Federal minimum wage 
under the FLSA was $5.15 per hour. In the case of tipped employees, the 
FLSA provided that the minimum wage could be reduced to $2.13 per hour 
(that is, the employer is only required to pay cash equal to $2.13 per 
hour) if the combination of tips and cash income equaled the Federal 
minimum wage.
---------------------------------------------------------------------------
Reporting and allocation requirements
      Employees are required to report monthly tips to their 
employer.\917\ Certain large\918\ food or beverage 
establishments are required to report to the IRS and employees 
various information including gross receipts of the 
establishment, and to allocate among employees who customarily 
receive tip income an amount equal to eight percent of gross 
receipts in excess of the amount of tips reported by such 
employees.\919\ Employee tip income that is reported by 
employees is treated as employer-provided wages subject to 
FICA.
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    \917\Sec. 6053(a).
    \918\A large establishment for this purpose is one which normally 
employed more than 10 employees on a typical business day during the 
preceding calendar year.
    \919\Sec. 6053(c).
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                               HOUSE BILL

      The provision revises the amount of the credit for FICA 
taxes an employer pays on tips, as an amount equal to the 
employer's FICA taxes paid on tips in excess of those treated 
as minimum wages under the FLSA without regard to the January 
1, 2007 date. For 2017, this amount is $7.25. In addition, the 
credit is permitted only if the employer satisfies the 
reporting requirements of section 6053(c) to the IRS and 
employees, and allocates among employees who customarily 
receive tip income an amount equal to 10 percent (rather than 
eight percent) of gross receipts in excess of the amount of 
tips reported by such employees. The claiming of the credit 
remains elective. However, if any size eligible food or 
beverage establishment elects to claim the FICA tip credit for 
any taxable year after the provision takes effect, the 
establishment must satisfy this reporting and 10-percent 
allocation requirement for that taxable year. Reporting and 
allocation requirements for food and beverage establishments 
that elect not to claim the credit remain unchanged.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
9. Employer credit for paid family and medical leave (sec. 13403 of the 
        Senate amendment, and new sec. 45S of the Code)

                              PRESENT LAW

      Present law does not provide a credit to employers for 
compensation paid to employees while on leave.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision allows eligible employers to claim a 
general business credit equal to 12.5 percent of the amount of 
wages paid to qualifying employees during any period in which 
such employees are on family and medical leave if the rate of 
payment under the program is 50 percent of the wages normally 
paid to an employee. The credit is increased by 0.25 percentage 
points (but not above 25 percent) for each percentage point by 
which the rate of payment exceeds 50 percent. The maximum 
amount of family and medical leave that may be taken into 
account with respect to any employee for any taxable year is 12 
weeks.
      An eligible employer is one who has in place a written 
policy that allows all qualifying full-time employees not less 
than two weeks of annual paid family and medical leave, and who 
allows all less-than-full-time qualifying employees a 
commensurate amount of leave on a pro rata basis. For purposes 
of this requirement, leave paid for by a State or local 
government is not taken into account. A ``qualifying employee'' 
means any employee as defined in section 3(e) of the Fair Labor 
Standards Act of 1938 who has been employed by the employer for 
one year or more, and who for the preceding year, had 
compensation not in excess of 60 percent of the compensation 
threshold for highly compensated employees.\920\ The Secretary 
will make determinations as to whether an employer or an 
employee satisfies the applicable requirements for an eligible 
employer or qualifying employee, based on information provided 
by the employer.
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    \920\Sec. 414(g)(1)(B) ($120,000 for 2017).
---------------------------------------------------------------------------
      ``Family and medical leave'' is defined as leave 
described under sections 102(a)(1)(a)-(e) or 102(a)(3) of the 
Family and Medical Leave Act of 1993.\921\ If an employer 
provides paid leave as vacation leave, personal leave, or other 
medical or sick leave, this paid leave would not be considered 
to be family and medical leave.
---------------------------------------------------------------------------
    \921\In order to be an eligible employer, an employer must provide 
certain protections applicable under the Family and Medical Leave Act 
of 1993, regardless of whether they otherwise apply. Specifically, the 
employer must provide paid family and medical leave in compliance with 
a policy which ensures that the employer will not interfere with, 
restrain, or deny the exercise of or the attempt to exercise, any right 
provided under the policy and will not discharge or in any other manner 
discriminate against any individual for opposing any practice 
prohibited by the policy.
---------------------------------------------------------------------------
      This proposal would not apply to wages paid in taxable 
years beginning after December 31, 2019.
      Effective date.--The provision is generally effective for 
wages paid in taxable years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

                           F. Energy Credits

1. Modifications to credit for electricity produced from certain 
        renewable resources (sec. 3501 of the House bill and sec. 45 of 
        the Code)

                              PRESENT LAW

In general
      An income tax credit is allowed for the production of 
electricity from qualified energy resources at qualified 
facilities (the ``renewable electricity production 
credit'').\922\ Qualified energy resources comprise wind, 
closed-loop biomass, open-loop biomass, geothermal energy, 
municipal solid waste, qualified hydropower production, and 
marine and hydrokinetic renewable energy. Qualified facilities 
are, generally, facilities that generate electricity using 
qualified energy resources. To be eligible for the credit, 
electricity produced from qualified energy resources at 
qualified facilities must be sold by the taxpayer to an 
unrelated person.
---------------------------------------------------------------------------
    \922\Sec. 45. In addition to the renewable electricity production 
credit, section 45 also provides income tax credits for the production 
of Indian coal and refined coal at qualified facilities.

    SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE
                                RESOURCES
------------------------------------------------------------------------
                                   Credit amount for
 Eligible electricity production    2017 (cents per      Expiration\1\
       activity (sec. 45)           kilowatt-hour)
------------------------------------------------------------------------
Wind............................  2.4...............  December 31, 2019
Closed-loop biomass.............  2.4...............  December 31, 2016
Open-loop biomass (including      1.2...............  December 31, 2016
 agricultural livestock waste
 nutrient facilities).
Geothermal......................  2.4...............  December 31, 2016
Municipal solid waste (including  1.2...............  December 31, 2016
 landfill gas facilities and
 trash combustion facilities).
Qualified hydropower............  1.2...............  December 31, 2016
Marine and hydrokinetic.........  1.2...............  December 31, 2016
------------------------------------------------------------------------
\1\Expires for property the construction of which begins after this date
  .

      The credit rate, initially set at 1.5 cents per kilowatt-
hour (reduced by one-half for certain renewable resources) is 
adjusted annually for inflation.\923\ In general, the credit is 
available for electricity produced during the first 10 years 
after a facility has been placed in service. Taxpayers may also 
elect to get a 30-percent investment tax credit in lieu of this 
production tax credit.\924\
---------------------------------------------------------------------------
    \923\The most recent inflation adjustment factors can be in IRS 
Notice 2017-33, I.R.B. 2017-22, May 30, 2017.
    \924\Sec. 48(a)(5).
---------------------------------------------------------------------------
Phase-down for wind facilities
      In the case of wind facilities, the available production 
tax credit or investment tax credit is reduced by 20 percent 
for facilities the construction of which begins in 2017, by 40 
percent for facilities the construction of which begins in 
2018, and by 60 percent for facilities the construction of 
which begins in 2019.
Special rules for determining when the construction of a facility 
        begins
      In general, a taxpayer may establish the beginning of 
construction of a facility by beginning physical work of a 
significant nature (the ``physical work test'').\925\ 
Alternatively, a taxpayer may establish the beginning of 
construction by meeting the safe harbor test which generally 
requires that the taxpayer have paid or incurred five percent 
of the total cost of constructing the facility (the ``five 
percent safe harbor'').\926\ Both methods require that a 
taxpayer make continuous progress towards completion once 
construction has begun.\927\ To demonstrate that continuous 
progress is being made, taxpayers relying on the physical work 
test must show that the project is undergoing ``continuous 
construction,'' and taxpayer relying on the five percent safe 
harbor must show ``continuous effort'' to complete the 
project.\928\ Collectively, these two tests are referred to as 
the ``continuity requirement.''\929\
---------------------------------------------------------------------------
    \925\IRS Notice 2013-29, 2013-20 I.R.B. 1085, April 14, 2013.
    \926\Ibid.
    \927\Ibid. See also, Notice 2016-31, 2016-23 I.R.B. 1025, May 5, 
2016.
    \928\Ibid.
    \929\Notice 2016-31, 2016-23 I.R.B. 1025, May 5, 2016.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision eliminates the inflation adjustment for 
wind facilities the construction of which begins after the date 
of enactment. Such facilities are entitled to a credit of 1.5 
cents per kilowatt-hour (i.e., the statutory credit rate 
unadjusted for inflation). Credits remain subject to the phase-
down based on the year construction begins.
      The provision includes a special rule for determining the 
beginning of construction, which is intended to codify Treasury 
guidance for determining when construction of a facility has 
begun, including the physical work test, the five percent safe 
harbor, and the continuity requirement.
      Effective date.--The provision terminating the inflation 
adjustment is effective for taxable years ending after the date 
of enactment. The provision codifying existing guidance for 
determining when construction has begun is effective for 
taxable years beginning before, on, or after the date of 
enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
2. Modification of the energy investment tax credit (sec. 3502 of the 
        House bill and sec. 48 of the Code)

                              PRESENT LAW

            In general
      A permanent, nonrefundable, 10-percent business energy 
credit\930\ is allowed for the cost of new property that is 
equipment that either (1) uses solar energy to generate 
electricity, to heat or cool a structure, or to provide solar 
process heat or (2) is used to produce, distribute, or use 
energy derived from a geothermal deposit, but only, in the case 
of electricity generated by geothermal power, up to the 
electric transmission stage. Property used to generate energy 
for the purposes of heating a swimming pool is not eligible 
solar energy property.
---------------------------------------------------------------------------
    \930\Sec. 48.
---------------------------------------------------------------------------
      In addition to the permanent credit, temporary investment 
credits are available for a variety of renewable and 
alternative energy property. The rules governing these 
temporary credits are described below.
      The energy credit is a component of the general business 
credit.\931\ An unused general business credit generally may be 
carried back one year and carried forward 20 years.\932\ The 
taxpayer's basis in the property is reduced by one-half of the 
amount of the credit claimed. For projects whose construction 
time is expected to equal or exceed two years, the credit may 
be claimed as progress expenditures are made on the project, 
rather than during the year the property is placed in service. 
The credit is allowed against the alternative minimum tax.
---------------------------------------------------------------------------
    \931\Sec. 38(b)(1).
    \932\Sec. 39.
---------------------------------------------------------------------------
            Solar energy property
      The credit rate for solar energy property is increased to 
30 percent in the case of property the construction of which 
begins before January 1, 2020. The rate is increased to 26 
percent in the case of property the construction of which 
begins in calendar year 2020. The rate is increased to 22 
percent in the case of property the construction of which 
begins in calendar year 2021. To qualify for the enhanced 
credit rates, the property must be placed in service before 
January 1, 2024.
      Additionally, equipment that uses fiber-optic distributed 
sunlight (``fiber optic solar'') to illuminate the inside of a 
structure is solar energy property eligible for the 30-percent 
credit, but only for property placed in service before January 
1, 2017.
            Fuel cell property and microturbine property
      The energy credit applies to qualified fuel cell power 
plant property, but only for periods prior to January 1, 2017. 
The credit rate is 30 percent.
      A qualified fuel cell power plant is an integrated system 
composed of a fuel cell stack assembly and associated balance 
of plant components that (1) converts a fuel into electricity 
using electrochemical means, and (2) has an electricity-only 
generation efficiency of greater than 30 percent and a capacity 
of at least one-half kilowatt. The credit may not exceed $1,500 
for each 0.5 kilowatt of capacity.
      The energy credit applies to qualifying stationary 
microturbine power plant property for periods prior to January 
1, 2017. The credit is limited to the lesser of 10 percent of 
the basis of the property or $200 for each kilowatt of 
capacity.
      A qualified stationary microturbine power plant is an 
integrated system comprised of a gas turbine engine, a 
combustor, a recuperator or regenerator, a generator or 
alternator, and associated balance of plant components that 
converts a fuel into electricity and thermal energy. Such 
system also includes all secondary components located between 
the existing infrastructure for fuel delivery and the existing 
infrastructure for power distribution, including equipment and 
controls for meeting relevant power standards, such as voltage, 
frequency, and power factors. Such system must have an 
electricity-only generation efficiency of not less than 26 
percent at International Standard Organization conditions and a 
capacity of less than 2,000 kilowatts.
            Geothermal heat pump property
      The energy credit applies to qualified geothermal heat 
pump property placed in service prior to January 1, 2017. The 
credit rate is 10 percent. Qualified geothermal heat pump 
property is equipment that uses the ground or ground water as a 
thermal energy source to heat a structure or as a thermal 
energy sink to cool a structure.
            Small wind property
      The energy credit applies to qualified small wind energy 
property placed in service prior to January 1, 2017. The credit 
rate is 30 percent. Qualified small wind energy property is 
property that uses a qualified wind turbine to generate 
electricity. A qualifying wind turbine means a wind turbine of 
100 kilowatts of rated capacity or less.
            Combined heat and power property
      The energy credit applies to combined heat and power 
(``CHP'') property placed in service prior to January 1, 2017. 
The credit rate is 10 percent.
      CHP property is property: (1) that uses the same energy 
source for the simultaneous or sequential generation of 
electrical power, mechanical shaft power, or both, in 
combination with the generation of steam or other forms of 
useful thermal energy (including heating and cooling 
applications); (2) that has an electrical capacity of not more 
than 50 megawatts or a mechanical energy capacity of not more 
than 67,000 horsepower or an equivalent combination of 
electrical and mechanical energy capacities; (3) that produces 
at least 20 percent of its total useful energy in the form of 
thermal energy that is not used to produce electrical or 
mechanical power, and produces at least 20 percent of its total 
useful energy in the form of electrical or mechanical power (or 
a combination thereof); and (4) the energy efficiency 
percentage of which exceeds 60 percent. CHP property does not 
include property used to transport the energy source to the 
generating facility or to distribute energy produced by the 
facility.
      The otherwise allowable credit with respect to CHP 
property is reduced to the extent the property has an 
electrical capacity or mechanical capacity in excess of any 
applicable limits. Property in excess of the applicable limit 
(15 megawatts or a mechanical energy capacity of more than 
20,000 horsepower or an equivalent combination of electrical 
and mechanical energy capacities) is permitted to claim a 
fraction of the otherwise allowable credit. The fraction is 
equal to the applicable limit divided by the capacity of the 
property. For example, a 45 megawatt property would be eligible 
to claim 15/45ths, or one third, of the otherwise allowable 
credit. Again, no credit is allowed if the property exceeds the 
50 megawatt or 67,000 horsepower limitations described above.
      Additionally, systems whose fuel source is at least 90 
percent open-loop biomass and that would qualify for the credit 
but for the failure to meet the efficiency standard are 
eligible for a credit that is reduced in proportion to the 
degree to which the system fails to meet the efficiency 
standard. For example, a system that would otherwise be 
required to meet the 60-percent efficiency standard, but which 
only achieves 30-percent efficiency, would be permitted a 
credit equal to one-half of the otherwise allowable credit 
(i.e., a 5-percent credit).
            Election of energy credit in lieu of section 45 production 
                    tax credit
      A taxpayer may make an irrevocable election to have the 
property used in certain qualified renewable power facilities 
be treated as energy property eligible for a 30-percent 
investment credit under section 48. For this purpose, qualified 
facilities are facilities otherwise eligible for the renewable 
electricity production tax credit with respect to which no 
credit under section 45 has been allowed. A taxpayer electing 
to treat a facility as energy property may not claim the 
production credit under section 45. In the case of non-wind 
facilities, to make this election, construction must begin 
before January 1, 2017. For wind facilities, the 30-percent 
credit rate is reduced by 20 percent in the case of any wind 
facility the construction of which begins in calendar year 
2017, by 40 percent in the case of any wind facility the 
construction of which begins in calendar year 2018, and by 60 
percent in the case of any wind facility the construction of 
which begins in calendar year 2019. The credit for wind 
facilities expires for facilities the construction of which 
begins after calendar year 2019.
      In general, a taxpayer may establish the beginning of 
construction of a facility by beginning physical work of a 
significant nature (the ``physical work test'').\933\ 
Alternatively, a taxpayer may establish the beginning of 
construction by meeting the safe harbor test which generally 
requires that the taxpayer have paid or incurred five percent 
of the total cost of constructing the facility (the ``five 
percent safe harbor'').\934\ Both methods require that a 
taxpayer make continuous progress towards completion once 
construction has begun.\935\ To demonstrate that continuous 
progress is being made, taxpayers relying on the physical work 
test must show that the project is undergoing ``continuous 
construction,'' and taxpayers relying on the five percent safe 
harbor must show ``continuous effort'' to complete the 
project.\936\ Collectively, these two tests are referred to as 
the ``continuity requirement.''\937\
---------------------------------------------------------------------------
    \933\IRS Notice 2013-29, 2013-20 I.R.B. 1085, April 14, 2013.
    \934\Ibid.
    \935\Ibid. See also, Notice 2016-31, 2016-23 I.R.B. 1025, May 5, 
2016.
    \936\Ibid.
    \937\Notice 2016-31, 2016-23 I.R.B. 1025, May 5, 2016.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision extends the energy credit for fiber optic 
solar, fuel cell, microturbine, geothermal heat pump, small 
wind, and combined heat and power property. In each case, the 
credit is extended for property the construction of which 
begins before January 1, 2022. In the case of fiber optic 
solar, fuel cell, and small wind property, the credit rate is 
reduced to 26 percent for property the construction of which 
begins in calendar year 2020 and to 22 percent for property the 
construction of which begins in calendar year 2021. Qualified 
property must be placed in service before January 1, 2024.
      The provision terminates the permanent credits for solar 
and geothermal property the construction of which begins after 
December 31, 2027.
      The provision includes a special rule for determining the 
beginning of construction, which is intended to adopt Treasury 
guidance for determining when construction of a facility has 
begun, including the physical work test, the five percent safe 
harbor, and the continuity requirement.
      Effective date.--The provision generally applies to 
periods after December 31, 2016, under rules similar to the 
rules of section 48(m), as in effect on the day before the date 
of enactment of the Revenue Reconciliation Act of 1990. The 
extension of the credit for combined heat and power system 
property applies to property placed in service after December 
31, 2016. The reduced credit rates and the termination of the 
permanent credits are effective on the date of the enactment of 
the provision. The special rule for determining the beginning 
of construction of qualified property applies to taxable years 
beginning before, on, or after the date of enactment of the 
provision.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
3. Extension and phaseout of residential energy efficient property 
        credit (sec. 3503 of the House bill and sec. 25D of the Code)

                              PRESENT LAW

In general
      Section 25D provides a personal tax credit for the 
purchase of qualified solar electric property and qualified 
solar water heating property that is used exclusively for 
purposes other than heating swimming pools and hot tubs. The 
credit is equal to 30 percent of qualifying expenditures.
      Section 25D also provides a 30 percent credit for the 
purchase of qualified geothermal heat pump property, qualified 
small wind energy property, and qualified fuel cell power 
plants. The credit for any fuel cell may not exceed $500 for 
each 0.5 kilowatt of capacity.
      The credit is nonrefundable. The credit with respect to 
all qualifying property may be claimed against the alternative 
minimum tax.
      With the exception of solar property, the credit expires 
for property placed in service after December 31, 2016. In the 
case of qualified solar electric property and solar water 
heating property, the credit expires for property placed in 
service after December 31, 2021. In addition, the credit rate 
for such solar property is reduced to 26 percent for property 
placed in service in calendar year 2020 and to 22 percent for 
property placed in service in calendar year 2021.
Qualified property
      Qualified solar electric property is property that uses 
solar energy to generate electricity for use in a dwelling 
unit. Qualifying solar water heating property is property used 
to heat water for use in a dwelling unit located in the United 
States and used as a residence if at least half of the energy 
used by such property for such purpose is derived from the sun.
      A qualified fuel cell power plant is an integrated system 
comprised of a fuel cell stack assembly and associated balance 
of plant components that (1) converts a fuel into electricity 
using electrochemical means, (2) has an electricity-only 
generation efficiency of greater than 30 percent, and (3) has a 
nameplate capacity of at least 0.5 kilowatt. The qualified fuel 
cell power plant must be installed on or in connection with a 
dwelling unit located in the United States and used by the 
taxpayer as a principal residence.
      Qualified small wind energy property is property that 
uses a wind turbine to generate electricity for use in a 
dwelling unit located in the United States and used as a 
residence by the taxpayer.
      Qualified geothermal heat pump property means any 
equipment which (1) uses the ground or ground water as a 
thermal energy source to heat the dwelling unit or as a thermal 
energy sink to cool such dwelling unit, (2) meets the 
requirements of the Energy Star program which are in effect at 
the time that the expenditure for such equipment is made, and 
(3) is installed on or in connection with a dwelling unit 
located in the United States and used as a residence by the 
taxpayer.
Additional rules
      The depreciable basis of the property is reduced by the 
amount of the credit. Expenditures for labor costs allocable to 
onsite preparation, assembly, or original installation of 
property eligible for the credit are eligible expenditures.
      Special proration rules apply in the case of jointly 
owned property, condominiums, and tenant-stockholders in 
cooperative housing corporations. If less than 80 percent of 
the property is used for nonbusiness purposes, only that 
portion of expenditures that is used for nonbusiness purposes 
is taken into account.

                               HOUSE BILL

      The provision extends the residential energy efficient 
property credit with respect to non-solar qualified property 
through December 31, 2021. The credit rate for such property is 
reduced to 26 percent for property placed in service in 
calendar year 2020 and to 22 percent for property placed in 
service in calendar year 2021.
      Effective date.--The provision applies to property placed 
in service after December 31, 2016.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
4. Repeal of enhanced oil recovery credit (sec. 3504 of the House bill 
        and sec. 43 of the Code)

                              PRESENT LAW

      Section 43 provides a 15-percent credit for expenses 
associated with an enhanced oil recovery (``EOR'') project. 
Qualified EOR costs consist of the following designated 
expenses associated with an EOR project: (1) amounts paid for 
depreciable tangible property; (2) intangible drilling and 
development expenses; (3) tertiary injectant expenses; and (4) 
construction costs for certain Alaskan natural gas treatment 
facilities. An EOR project is generally a project that involves 
increasing the amount of recoverable domestic crude oil through 
the use of one or more tertiary recovery methods (as defined in 
section 193(b)(3)), such as injecting steam or carbon dioxide 
into a well to effect oil displacement. The credit is reduced 
as the price of oil exceeds a certain threshold.

                               HOUSE BILL

      The provision repeals the enhanced oil recovery credit.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
5. Repeal of credit for producing oil and gas from marginal wells (sec. 
        3505 of the House bill and sec. 45I of the Code)

                              PRESENT LAW

      Section 45I provides a $3-per-barrel credit for the 
production of crude oil and a $0.50 credit per 1,000 cubic feet 
of qualified natural gas production. In both cases, the credit 
is available only for production from a ``qualified marginal 
well.''
      A qualified marginal well is defined as a domestic well: 
(1) production from which is treated as marginal production for 
purposes of the Code's percentage depletion rules; or (2) that 
during the taxable year had average daily production of not 
more than 25 barrel equivalents and produces water at a rate of 
not less than 95 percent of total well effluent. The maximum 
amount of production on which credit could be claimed is 1,095 
barrels or barrel equivalents.
      The credit is not available to production occurring if 
the reference price of oil exceeds $18 ($2.00 for natural gas). 
The credit is reduced proportionately for reference prices 
between $15 and $18 ($1.67 and $2.00 for natural gas).
      The credit is treated as a general business credit. 
Unused credits can be carried back for up to five years rather 
than the generally applicable carryback period of one year. The 
credit is indexed for inflation.

                               HOUSE BILL

      The provision repeals the credit for producing oil and 
gas from marginal wells.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
6. Modification of credit for production from advanced nuclear power 
        facilities (sec. 3506 of the House bill and sec. 45J of the 
        Code)

                              PRESENT LAW

      Taxpayers producing electricity at a qualifying advanced 
nuclear power facility may claim a credit equal to 1.8 cents 
per kilowatt-hour of electricity produced for the eight-year 
period starting when the facility is placed in service.\938\ 
The aggregate amount of credit that a taxpayer may claim in any 
year during the eight-year period is subject to limitation 
based on allocated capacity and an annual limitation as 
described below.
---------------------------------------------------------------------------
    \938\Sec. 45J. The 1.8-cents credit amount is reduced, but not 
below zero, if the annual average contract price per kilowatt-hour of 
electricity generated from advanced nuclear power facilities in the 
preceding year exceeds eight cents per kilowatt-hour. The eight-cent 
price comparison level is indexed for inflation after 1992 (12.6 cents 
for 2017).
---------------------------------------------------------------------------
      An advanced nuclear facility is any nuclear facility for 
the production of electricity, the reactor design for which was 
approved after 1993 by the Nuclear Regulatory Commission. For 
this purpose, a qualifying advanced nuclear facility does not 
include any facility for which a substantially similar design 
for a facility of comparable capacity was approved before 1994.
      A qualifying advanced nuclear facility is an advanced 
nuclear facility for which the taxpayer has received an 
allocation of megawatt capacity from the Secretary of the 
Treasury (``the Secretary'') and is placed in service before 
January 1, 2021. The taxpayer may only claim credit for 
production of electricity equal to the ratio of the allocated 
capacity that the taxpayer receives from the Secretary to the 
rated nameplate capacity of the taxpayer's facility. For 
example, if the taxpayer receives an allocation of 750 
megawatts of capacity from the Secretary and the taxpayer's 
facility has a rated nameplate capacity of 1,000 megawatts, 
then the taxpayer may claim three-quarters of the otherwise 
allowable credit, or 1.35 cents per kilowatt-hour, for each 
kilowatt-hour of electricity produced at the facility (subject 
to the annual limitation described below). The credit is 
restricted to 6,000 megawatts of national capacity. Once that 
limitation has been reached, the Secretary may make no 
additional allocations. Treasury guidance required allocation 
applications to be filed before February 1, 2014.\939\
---------------------------------------------------------------------------
    \939\I.R.S. Notice 2013-68.
---------------------------------------------------------------------------
      A taxpayer operating a qualified facility may claim no 
more than $125 million in tax credits per 1,000 megawatts of 
allocated capacity in any one year of the eight-year credit 
period. If the taxpayer operates a 1,350 megawatt rated 
nameplate capacity system and has received an allocation from 
the Secretary for 1,350 megawatts of capacity eligible for the 
credit, the taxpayer's annual limitation on credits that may be 
claimed is equal to 1.35 times $125 million, or $168.75 
million. If the taxpayer operates a facility with a nameplate 
rated capacity of 1,350 megawatts, but has received an 
allocation from the Secretary for 750 megawatts of credit 
eligible capacity, then the two limitations apply such that the 
taxpayer may claim a credit effectively equal to one cent per 
kilowatt-hour of electricity produced (calculated as described 
above) subject to an annual credit limitation of $93.75 million 
in credits (three-quarters of $125 million).
      The credit is part of the general business credit.

                               HOUSE BILL

      The provision modifies the national megawatt capacity 
limitation for the advanced nuclear power production credit. To 
the extent any amount of the 6,000 megawatts of authorized 
capacity remains unutilized, the provision requires the 
Secretary to allocate such capacity first to facilities placed 
in service before the year 2021, to the extent such facilities 
did not receive an allocation equal to their full nameplate 
capacity, and then to facilities placed in service after such 
date in the order in which such facilities are placed in 
service. The provision provides that the present-law placed-in-
service sunset date of January 1, 2021, does not apply with 
respect to allocations of such unutilized national megawatt 
capacity.
      The provision also allows qualified public entities to 
elect to forgo credits to which they otherwise would be 
entitled in favor of an eligible project partner. Qualified 
public entities are defined as (1) a Federal, State, or local 
government of any political subdivision, agency, or 
instrumentality thereof; (2) a mutual or cooperative electric 
company; or (3) a not-for-profit electric utility which has or 
had received a loan or loan guarantee under the Rural 
Electrification Act of 1936.\940\ An eligible project partner 
under the provision generally includes any person who designed 
or constructed the nuclear power plant, participates in the 
provision of nuclear steam or nuclear fuel to the power plant, 
or has an ownership interest in the facility. In the case of a 
facility owned by a partnership, where the credit is determined 
at the partnership level, any electing qualified public entity 
is treated as the taxpayer with respect to such entity's 
distributive share of such credits, and any other partner is an 
eligible project partner.
---------------------------------------------------------------------------
    \940\7 U.S.C. sec. 901 et seq.
---------------------------------------------------------------------------
      Effective date.--The provision requiring the allocation 
of unutilized national megawatt capacity limitation is 
effective on the date of enactment. The provision allowing an 
election by qualified public entities to forgo credits in favor 
of an eligible project partner is effective for taxable years 
beginning after the date of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include in the House 
bill.

                            G. Bond Reforms

1. Termination of private activity bonds (sec. 3601 of the House bill 
        and sec. 103 of the Code)

                              PRESENT LAW

In general
      Under present law, gross income generally does not 
include interest paid on State or local bonds.\941\ State and 
local bonds are classified generally as either governmental 
bonds or private activity bonds. Governmental bonds are bonds 
which are primarily used to finance governmental functions or 
that are repaid with governmental funds. Private activity bonds 
are bonds with respect to which the State or local government 
serves as a conduit providing financing to nongovernmental 
persons (e.g., private businesses or individuals). The 
exclusion from income for State and local bonds only applies to 
private activity bonds if the bonds are issued for certain 
permitted purposes (``qualified private activity bonds'').
---------------------------------------------------------------------------
    \941\Sec. 103.
---------------------------------------------------------------------------
Private activity bonds
      Present law provides three main tests for determining 
whether a State or local bond is in substance a private 
activity bond, the two-part private business test, the five-
percent unrelated or disproportionate use test, and the private 
loan test.
            Private business test
      Private business use and private payments result in State 
and local bonds being private activity bonds if both parts of 
the two-part private business test are satisfied--
            1. More than 10 percent of the bond proceeds is to 
        be used (directly or indirectly) by a private business 
        (the ``private business use test''); and
            2. More than 10 percent of the debt service on the 
        bonds is secured by an interest in property to be used 
        in a private business use or to be derived from 
        payments in respect of such property (the ``private 
        payment test'').
      Private business use generally includes any use by a 
business entity (including the Federal government), which 
occurs pursuant to terms not generally available to the general 
public. For example, if bond-financed property is leased to a 
private business (other than pursuant to certain short-term 
leases for which safe harbors are provided under Treasury 
regulations), bond proceeds used to finance the property are 
treated as used in a private business use, and rental payments 
are treated as securing the payment of the bonds. Private 
business use also can arise when a governmental entity 
contracts for the operation of a governmental facility by a 
private business under a management contract that does not 
satisfy Treasury regulatory safe harbors regarding the types of 
payments made to the private operator and the length of the 
contract.
            Five-percent unrelated or disproportionate business use 
                    test
      A second standard to determine whether a bond is to be 
treated as a private activity bond is the five percent 
unrelated or disproportionate business use test. Under this 
test the private business use and private payment test 
(described above) are separately applied substituting five 
percent for 10 percent and generally only taking into account 
private business use and private payments that are not related 
or not proportionate to the government use of the bond 
proceeds. For example, while a bond issue that finances a new 
State or local government office building may include a 
cafeteria, the issue may become a private activity bond if the 
size of the cafeteria is excessive (as determined under this 
rule).
            Private loan test
      The third standard for determining whether a State or 
local bond is a private activity bond is whether an amount 
exceeding the lesser of (1) five percent of the bond proceeds 
or (2) $5 million is used (directly or indirectly) to finance 
loans to private persons. Private loans include both business 
and other (e.g., personal) uses and payments by private 
persons; however, in the case of business uses and payments, 
all private loans also constitute private business uses and 
payments subject to the private business test. Present law 
provides that the substance of a transaction governs in 
determining whether the transaction gives rise to a private 
loan. In general, any transaction which transfers tax ownership 
of property to a private person is treated as a private loan.
            Special limit on certain output facilities
      A special rule for output facilities treats bonds as 
private activity bonds if more than $15 million of the proceeds 
of the bond issue are used to finance an output facility (an 
output facility includes electric and gas generation, 
transmission and related facilities but not a facility for the 
furnishing of water).\942\
---------------------------------------------------------------------------
    \942\Sec. 141(b)(4).
---------------------------------------------------------------------------
            Special volume cap requirement for larger transactions
      A special volume cap requirement for larger transactions 
treats bonds as private activity bonds if the nonqualified 
amount of private business use or private payments exceeds $15 
million (even if that amount is within the general 10-percent 
private business limitation for governmental bonds) unless the 
issuer obtains a private activity bond volume allocation.\943\
---------------------------------------------------------------------------
    \943\Sec. 141(b)(5).
---------------------------------------------------------------------------
Qualified private activity bonds
      As stated, interest on private activity bonds is taxable 
unless the bonds meet the requirements for qualified private 
activity bonds. Qualified private activity bonds permit States 
or local governments to act as conduits providing tax-exempt 
financing for certain private activities. The definition of 
qualified private activity bonds includes an exempt facility 
bond, or qualified mortgage, veterans' mortgage, small issue, 
redevelopment, 501(c)(3), or student loan bond.\944\ The 
definition of exempt facility bond includes bonds issued to 
finance certain transportation facilities (airports, ports, 
mass commuting, and high-speed intercity rail facilities); 
qualified residential rental projects; privately owned and/or 
operated utility facilities (sewage, water, solid waste 
disposal, and local district heating and cooling facilities, 
certain private electric and gas facilities, and hydroelectric 
dam enhancements); public/private educational facilities; 
qualified green building and sustainable design projects; and 
qualified highway or surface freight transfer facilities.\945\
---------------------------------------------------------------------------
    \944\Sec. 141(e).
    \945\Sec. 142(a).
---------------------------------------------------------------------------
      In most cases, the aggregate volume of these tax-exempt 
private activity bonds is restricted by annual aggregate volume 
limits imposed on bonds issued by issuers within each State. 
For 2017, the State volume limit is the greater of $100 
multiplied by the State population, or $305.32 million.\946\
---------------------------------------------------------------------------
    \946\Sec. 3.20 of Rev. Proc. 2016-55, 2016-2 C.B. 707.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision repeals the exception from the exclusion 
from gross income for interest paid on qualified private 
activity bonds issued after December 31, 2017. Thus, such 
interest on private activity bond issued after such date is 
includible in the gross income of the taxpayer.\947\
---------------------------------------------------------------------------
    \947\The provisions do not apply to any previously issued bond, nor 
would the provisions prevent State and local governments from issuing 
private activity bonds in the future; the provisions merely remove the 
Federal tax subsidy for newly issued bonds. The bill also terminates 
section 25 of the Code as it relates to credits associated with 
mortgage credit certificates issued after December 31, 2017. See 
section 1102 of the bill (Repeal of nonrefundable credits).
---------------------------------------------------------------------------
      Effective date.--The provision applies to bonds issued 
after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
2. Repeal of advance refunding bonds (sec. 3602 of the House bill, sec. 
        13532 of the Senate amendment, and sec. 149(d) of the Code)

                              PRESENT LAW

      Section 103 generally provides that gross income does not 
include interest received on State or local bonds. State and 
local bonds are classified generally as either governmental 
bonds or private activity bonds. Governmental bonds are bonds 
the proceeds of which are primarily used to finance 
governmental facilities or the debt is repaid with governmental 
funds. Private activity bonds are bonds in which the State or 
local government serves as a conduit providing financing to 
nongovernmental persons (e.g., private businesses or 
individuals).\948\ Bonds issued to finance the activities of 
charitable organizations described in section 501(c)(3) 
(``qualified 501(c)(3) bonds'') are one type of private 
activity bond. The exclusion from income for interest on State 
and local bonds only applies if certain Code requirements are 
met.
---------------------------------------------------------------------------
    \948\Sec. 141.
---------------------------------------------------------------------------
      The exclusion for income for interest on State and local 
bonds applies to refunding bonds but there are limits on 
advance refunding bonds. A refunding bond is defined as any 
bond used to pay principal, interest, or redemption price on a 
prior bond issue (the refunded bond). Different rules apply to 
current as opposed to advance refunding bonds. A current 
refunding occurs when the refunded bond is redeemed within 90 
days of issuance of the refunding bonds. Conversely, a bond is 
classified as an advance refunding if it is issued more than 90 
days before the redemption of the refunded bond.\949\ Proceeds 
of advance refunding bonds are generally invested in an escrow 
account and held until a future date when the refunded bond may 
be redeemed.
---------------------------------------------------------------------------
    \949\Sec. 149(d)(5).
---------------------------------------------------------------------------
      Although there is no statutory limitation on the number 
of times that tax-exempt bonds may be currently refunded, the 
Code limits advance refundings. Generally, governmental bonds 
and qualified 501(c)(3) bonds may be advance refunded one 
time.\950\ Private activity bonds, other than qualified 
501(c)(3) bonds, may not be advance refunded at all.\951\ 
Furthermore, in the case of an advance refunding bond that 
results in interest savings (e.g., a high interest rate to low 
interest rate refunding), the refunded bond must be redeemed on 
the first call date 90 days after the issuance of the refunding 
bond that results in debt service savings.\952\
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    \950\Sec. 149(d)(3). Bonds issued before 1986 and pursuant to 
certain transition rules contained in the Tax Reform Act of 1986 may be 
advance refunded more than one time in certain cases.
    \951\Sec. 149(d)(2).
    \952\Sec. 149(d)(3)(A)(iii) and (B); Treas. Reg. sec. 1.149(d)-
1(f)(3). A ``call'' provision provides the issuer of a bond with the 
right to redeem the bond prior to the stated maturity.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision repeals the exclusion from gross income for 
interest on a bond issued to advance refund another bond.
      Effective date.--The provision applies to advance 
refunding bonds issued after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
3. Repeal of tax credit bonds (sec. 3603 of the House bill and secs. 
        54A, 54B, 54C, 54D, 54E, 54F and 6431 of the Code)

                              PRESENT LAW

In general
      Tax-credit bonds provide tax credits to investors to 
replace a prescribed portion of the interest cost. The 
borrowing subsidy generally is measured by reference to the 
credit rate set by the Treasury Department. Current tax-credit 
bonds include qualified tax credit bonds, which have certain 
common general requirements, and include new clean renewable 
energy bonds, qualified energy conservation bonds, qualified 
zone academy bonds, and qualified school construction 
bonds.\953\
---------------------------------------------------------------------------
    \953\The authority to issue two other types of tax-credit bonds, 
recovery zone economic development bonds and Build America Bonds, 
expired on January 1, 2011.
---------------------------------------------------------------------------
Qualified tax-credit bonds
            General rules applicable to qualified tax-credit bonds\954\
      Unlike tax-exempt bonds, qualified tax-credit bonds 
generally are not interest-bearing obligations. Rather, the 
taxpayer holding a qualified tax-credit bond on a credit 
allowance date is entitled to a tax credit. The amount of the 
credit is determined by multiplying the bond's credit rate by 
the face amount on the holder's bond. The credit rate for an 
issue of qualified tax credit bonds is determined by the 
Secretary and is estimated to be a rate that permits issuance 
of the qualified tax-credit bonds without discount and interest 
cost to the qualified issuer.\955\ The credit accrues quarterly 
and is includible in gross income (as if it were an interest 
payment on the bond), and can be claimed against regular income 
tax liability and alternative minimum tax liability. Unused 
credits may be carried forward to succeeding taxable years. In 
addition, credits may be separated from the ownership of the 
underlying bond similar to how interest coupons can be stripped 
for interest-bearing bonds.
---------------------------------------------------------------------------
    \954\Certain other rules apply to qualified tax credit bonds, such 
as maturity limitations, reporting requirements, spending rules, and 
rules relating to arbitrage. Separate rules apply in the case of tax-
credit bonds which are not qualified tax-credit bonds (i.e., ``recovery 
zone economic development bonds,'' and ``Build America Bonds'').
    \955\However, for new clean renewable energy bonds and qualified 
energy conservation bonds, the applicable credit rate is 70 percent of 
the otherwise applicable rate.
---------------------------------------------------------------------------
            New clean renewable energy bonds
      New clean renewable energy bonds (``New CREBs'') may be 
issued by qualified issuers to finance qualified renewable 
energy facilities.\956\ Qualified renewable energy facilities 
are facilities that: (1) qualify for the tax credit under 
section 45 (other than Indian coal and refined coal production 
facilities), without regard to the placed-in-service date 
requirements of that section; and (2) are owned by a public 
power provider, governmental body, or cooperative electric 
company.
---------------------------------------------------------------------------
    \956\Sec. 54C.
---------------------------------------------------------------------------
      The term ``qualified issuers'' includes: (1) public power 
providers; (2) a governmental body; (3) cooperative electric 
companies; (4) a not-for-profit electric utility that has 
received a loan or guarantee under the Rural Electrification 
Act; and (5) clean renewable energy bond lenders. There was 
originally a national limitation for New CREBs of $800 million. 
The national limitation was then increased by an additional 
$1.6 billion in 2009. As with other tax credit bonds, a 
taxpayer holding New CREBs on a credit allowance date is 
entitled to a tax credit. However, the credit rate on New CREBs 
is set by the Secretary at a rate that is 70 percent of the 
rate that would permit issuance of such bonds without discount 
and interest cost to the issuer.\957\
---------------------------------------------------------------------------
    \957\Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
---------------------------------------------------------------------------
            Qualified energy conservation bonds
      Qualified energy conservation bonds may be used to 
finance qualified conservation purposes.
      The term ``qualified conservation purpose'' means:
            1. Capital expenditures incurred for purposes of: 
        (a) reducing energy consumption in publicly owned 
        buildings by at least 20 percent; (b) implementing 
        green community programs;\958\ (c) rural development 
        involving the production of electricity from renewable 
        energy resources; or (d) any facility eligible for the 
        production tax credit under section 45 (other than 
        Indian coal and refined coal production facilities);
---------------------------------------------------------------------------
    \958\Capital expenditures to implement green community programs 
include grants, loans, and other repayment mechanisms to implement such 
programs. For example, States may issue these tax credit bonds to 
finance retrofits of existing private buildings through loans and/or 
grants to individual homeowners or businesses, or through other 
repayment mechanisms. Other repayment mechanisms can include periodic 
fees assessed on a government bill or utility bill that approximates 
the energy savings of energy efficiency or conservation retrofits. 
Retrofits can include heating, cooling, lighting, water-saving, storm 
water-reducing, or other efficiency measures.
---------------------------------------------------------------------------
            2. Expenditures with respect to facilities or 
        grants that support research in: (a) development of 
        cellulosic ethanol or other nonfossil fuels; (b) 
        technologies for the capture and sequestration of 
        carbon dioxide produced through the use of fossil 
        fuels; (c) increasing the efficiency of existing 
        technologies for producing nonfossil fuels; (d) 
        automobile battery technologies and other technologies 
        to reduce fossil fuel consumption in transportation; 
        and (e) technologies to reduce energy use in buildings;
            3. Mass commuting facilities and related facilities 
        that reduce the consumption of energy, including 
        expenditures to reduce pollution from vehicles used for 
        mass commuting;
            4. Demonstration projects designed to promote the 
        commercialization of: (a) green building technology; 
        (b) conversion of agricultural waste for use in the 
        production of fuel or otherwise; (c) advanced battery 
        manufacturing technologies; (d) technologies to reduce 
        peak-use of electricity; and (e) technologies for the 
        capture and sequestration of carbon dioxide emitted 
        from combusting fossil fuels in order to produce 
        electricity; and
            5. Public education campaigns to promote energy 
        efficiency (other than movies, concerts, and other 
        events held primarily for entertainment purposes).
      There was originally a national limitation on qualified 
energy conservation bonds of $800 million. The national 
limitation was then increased by an additional $2.4 billion in 
2009. As with other qualified tax credit bonds, the taxpayer 
holding qualified energy conservation bonds on a credit 
allowance date is entitled to a tax credit. The credit rate on 
the bonds is set by the Secretary at a rate that is 70 percent 
of the rate that would permit issuance of such bonds without 
discount and interest cost to the issuer.\959\
---------------------------------------------------------------------------
    \959\Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
---------------------------------------------------------------------------
            Qualified zone academy bonds
      Qualifies zone academy bonds (``QZABs'') are defined as 
any bond issued by a State or local government, provided that 
(1) at least 95 percent of the proceeds are used for the 
purpose of renovating, providing equipment to, developing 
course materials for use at, or training teachers and other 
school personnel in a ``qualified zone academy,'' and (2) 
private entities have promised to contribute to the qualified 
zone academy certain equipment, technical assistance or 
training, employee services, or other property or services with 
a value equal to at least 10 percent of the bond proceeds.
      A total of $400 million of QZABs has been authorized to 
be issued annually in calendar years 1998 through 2008. The 
authorization was increased to $1.4 billion for calendar year 
2009, and also for calendar year 2010. For each of the calendar 
years 2011 through 2016, the authorization was set at $400 
million.
            Qualified school construction bonds
      Qualified school construction bonds must meet three 
requirements: (1) 100 percent of the available project proceeds 
of the bond issue is used for the construction, rehabilitation, 
or repair of a public school facility or for the acquisition of 
land on which such a bond-financed facility is to be 
constructed; (2) the bonds are issued by a State or local 
government within which such school is located; and (3) the 
issuer designates such bonds as a qualified school construction 
bond.
      There is a national limitation on qualified school 
construction bonds of $11 billion for calendar years 2009 and 
2010, and zero after 2010. If an amount allocated is unused for 
a calendar year, it may be carried forward to the following and 
subsequent calendar years. Under a separate special rule, the 
Secretary of the Interior may allocate $200 million of school 
construction bond authority for Indian schools.
Direct-pay bonds and expired tax-credit bond provisions
      The Code provides that an issuer may elect to issue 
certain tax credit bonds as ``direct-pay bonds.'' Instead of a 
credit to the holder, with a ``direct-pay bond'' the Federal 
government pays the issuer a percentage of the interest on the 
bonds. The following tax credit bonds may be issued as direct-
pay bonds: new clean renewable energy bonds, qualified energy 
conservation bonds, and qualified school construction bonds. 
Qualified zone academy bonds may not be issued as direct-pay 
using any national zone academy bond allocation for calendar 
years after 2011 or any carryforward of such allocations. The 
ability to issue Build America Bonds and Recovery Zone bonds, 
which have direct-pay features, has expired.

                               HOUSE BILL

      The provision prospectively repeals authority to issue 
tax-credit bonds and direct-pay bonds.
      Effective date.--The provision applies to bonds issued 
after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill.
4. No tax-exempt bonds for professional stadiums (sec. 3604 of the 
        House bill and sec. 103 of the Code)

                              PRESENT LAW

In general
      Section 103 generally provides gross income does not 
include interest on State or local bonds. State and local bonds 
are classified generally as either governmental bonds or 
private activity bonds. Governmental bonds are bonds the 
proceeds of which are primarily used to finance governmental 
facilities or the debt is repaid with governmental funds. 
Private activity bonds are bonds in which the State or local 
government serves as a conduit providing financing to 
nongovernmental persons (e.g., private businesses or 
individuals). The exclusion from income for State and local 
bonds does not apply to private activity bonds, unless the 
bonds are issued for certain purposes (``qualified private 
activity bonds'') permitted by the Code and other Code 
requirements are met.
Private activity bond tests
            In general
      A private activity bond includes any bond that satisfies 
(1) the ``private business test'' (consisting of two 
components: a private business use test and a private security 
or payment test); or (2) ``the private loan financing 
test.''\960\
---------------------------------------------------------------------------
    \960\Sec. 141.
---------------------------------------------------------------------------
            Two-part private business test
      Under the private business test, a bond is a private 
activity bond if it is part of an issue in which:
      More than 10 percent of the proceeds of the issue 
(including use of the bond-financed property) are to be used in 
the trade or business of any person other than a governmental 
unit (``private business use test''); and
      More than 10 percent of the payment of principal or 
interest on the issue is, directly or indirectly, secured by 
(a) property used or to be used for a private business use or 
(b) to be derived from payments in respect of property, or 
borrowed money, used or to be used for a private business use 
(``private payment test'').\961\
---------------------------------------------------------------------------
    \961\The 10-percent private business test is reduced to five 
percent in the case of private business uses (and payments with respect 
to such uses) that are unrelated to any governmental use being financed 
by the issue.
---------------------------------------------------------------------------
      A bond is not a private activity bond unless both parts 
of the private business test (i.e., the private business use 
test and the private payment test) are met. For purposes of the 
private payment test, both direct and indirect payments made by 
any private person treated as using the financed property are 
taken into account. Payments by a person for the use of 
proceeds generally do not include payments for ordinary and 
necessary expenses (within the meaning of section 162) 
attributable to the operation and maintenance of financed 
property.\962\
---------------------------------------------------------------------------
    \962\Treas. Reg. sec. 1.141-4(c)(3).
---------------------------------------------------------------------------
            Private loan financing test
      A bond issue satisfies the private loan financing test if 
proceeds exceeding the lesser of $5 million or five percent of 
such proceeds are used directly or indirectly to finance loans 
to one or more nongovernmental persons.
Types of qualified private activity bonds
      The interest of qualified private activity bonds is tax 
exempt. A qualified private activity bond is a qualified 
mortgage, veterans' mortgage, small issue, student loan, 
redevelopment, 501(c)(3), or exempt facility bond.\963\ To 
qualify as an exempt facility bond, 95 percent of the net 
proceeds must be used to finance: (1) airports; (2) docks and 
wharves; (3) mass commuting facilities; (4) high-speed 
intercity rail facilities; (5) facilities for the furnishing of 
water; (6) sewage facilities; (7) solid waste disposal 
facilities; (8) hazardous waste disposal facilities; (9) 
qualified residential rental projects; (10) facilities for the 
local furnishing of electric energy or gas; (11) local district 
heating or cooling facilities; (12) environmental enhancements 
of hydroelectric generating facilities; (13) qualified public 
educational facilities; or (14) qualified green building and 
sustainable design projects.
---------------------------------------------------------------------------
    \963\Sec. 141(e).
---------------------------------------------------------------------------
Financing of sports facilities with governmental bonds
      In 1986, Congress eliminated a provision expressly 
allowing tax-exempt financing for sports facilities.\964\ 
Nevertheless, professional sports facilities continue to be 
financed with tax-exempt bonds despite the fact that privately 
owned sports teams are the primary (if not exclusive) users of 
such facilities. Present law permits the use of tax-exempt bond 
proceeds for private activities if either part of the two-part 
private business test is not met. Only if both parts of the 
private business test (private use and private payment) are met 
will the interest on such bonds be taxable. In the case of 
bond-financed professional sports facilities, issuers have 
intentionally structured the tax-exempt bond issuance and 
related transactions to fail the private payment test. In most 
of these transactions, the professional sports team is not 
required to pay for more than a small portion of its use of the 
sports facility. As a result, the private payment test is not 
met and the bonds financing the facility are not treated as 
private activity bonds, despite the existence of substantial 
private business use.
---------------------------------------------------------------------------
    \964\Sec. 1301 of the Tax Reform Act of 1986 (Pub. L. 99-514, 1986) 
(prior to amendment, sec. 103(b)(4)(B) of the Internal Revenue Code of 
1954 permitted tax-exempt financing for sports facilities).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision provides that the interest on bonds, the 
proceeds of which are to be used to finance or refinance 
capital expenditures allocable to a professional sports 
stadium, is not tax-exempt. The term ``professional sports 
stadium'' means any facility (or appurtenant real property) 
which during at least five days during any calendar year is 
used as a stadium or arena for professional sports, 
exhibitions, games, or training.
      Effective date.--The provision applies to bonds issued 
after November 2, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.

                              H. Insurance

1. Net operating losses of life insurance companies (sec. 3701 of the 
        House bill, sec. 13511 of the Senate amendment, and sec. 810 of 
        the Code)

                              PRESENT LAW

      A net operating loss (``NOL'') generally means the amount 
by which a taxpayer's business deductions exceed its gross 
income. In general, an NOL may be carried back two years and 
carried over 20 years to offset taxable income in such years. 
NOLs offset taxable income in the order of the taxable years to 
which the NOL may be carried.\965\
---------------------------------------------------------------------------
    \965\Sec. 172(b)(2).
---------------------------------------------------------------------------
      For purposes of computing the alternative minimum tax 
(``AMT''), a taxpayer's NOL deduction cannot reduce the 
taxpayer's alternative minimum taxable income (``AMTI'') by 
more than 90 percent of the AMTI.\966\
---------------------------------------------------------------------------
    \966\Sec. 56(d).
---------------------------------------------------------------------------
      In the case of a life insurance company, a deduction is 
allowed in the taxable year for operations loss carryovers and 
carrybacks, in lieu of the deduction for net operation losses 
allowed to other corporations.\967\ A life insurance company is 
permitted to treat a loss from operations (as defined under 
section 810(c)) for any taxable year as an operations loss 
carryback to each of the three taxable years preceding the loss 
year and an operations loss carryover to each of the 15 taxable 
years following the loss year.\968\
---------------------------------------------------------------------------
    \967\Secs. 810, 805(a)(5).
    \968\Sec. 810(b)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision repeals the operations loss deduction for 
life insurance companies and allows the NOL deduction under 
section 172.
      Effective date.--The provision applies to losses arising 
in taxable years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
2. Repeal of small life insurance company deduction (sec. 3702 of the 
        House bill, sec. 13512 of the Senate amendment, and sec. 806 of 
        the Code)

                              PRESENT LAW

      The small life insurance company deduction for any 
taxable year is 60 percent of so much of the tentative life 
insurance company taxable income (``LICTI'') for such taxable 
year as does not exceed $3 million, reduced by 15 percent of 
the excess of tentative LICTI over $3 million. The maximum 
deduction that can be claimed by a small company is $1.8 
million, and a company with a tentative LICTI of $15 million or 
more is not entitled to any small company deduction. A small 
life insurance company for this purpose is one with less than 
$500 million of assets.

                               HOUSE BILL

      The provision repeals the small life insurance company 
deduction.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
3. Surtax on life insurance company taxable income (sec. 3703 of the 
        House bill and sec. 801 of the Code)

                              PRESENT LAW

Tax on life insurance company taxable income
      In the case of a life insurance company, income tax is 
imposed on life insurance company taxable income at the rate 
applicable to taxable income of a corporation.

                               HOUSE BILL

      The provision imposes an additional eight-percent income 
tax on life insurance company taxable income.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
provision.
4. Adjustment for change in computing reserves (sec. 3704 of the House 
        bill, sec. 13513 of the Senate amendment, and sec. 807 of the 
        Code)

                              PRESENT LAW

Change in method of accounting
      In general, a taxpayer may change its method of 
accounting under section 446 with the consent of the Secretary 
(or may be required to change its method of accounting by the 
Secretary). In such instances, a taxpayer generally is required 
to make an adjustment (a ``section 481(a) adjustment'') to 
prevent amounts from being duplicated in, or omitted from, the 
calculation of the taxpayer's income. Pursuant to IRS 
procedures, negative section 481(a) adjustments generally are 
deducted from income in the year of the change whereas positive 
section 481(a) adjustments generally are required to be 
included in income ratably over four taxable years.\969\
---------------------------------------------------------------------------
    \969\See, e.g., Rev. Proc. 2015-13, 2015-5 I.R.B. 419, and Rev. 
Proc. 2017-30, 2017-18 I.R.B. 1131.
---------------------------------------------------------------------------
      However, section 807(f) explicitly provides that changes 
in the basis for determining life insurance company reserves 
are to be taken into account ratably over 10 years.
10-year spread for change in computing life insurance company reserves
      For Federal income tax purposes, a life insurance company 
includes in gross income any net decrease in reserves, and 
deducts a net increase in reserves.\970\ Methods for 
determining reserves for tax purposes generally are based on 
reserves prescribed by the National Association of Insurance 
Commissioners for purposes of financial reporting under State 
regulatory rules.
---------------------------------------------------------------------------
    \970\Sec. 807.
---------------------------------------------------------------------------
      Income or loss resulting from a change in the method of 
computing reserves is taken into account ratably over a 10-year 
period.\971\ The rule for a change in basis in computing 
reserves applies only if there is a change in basis in 
computing the Federally prescribed reserve (as distinguished 
from the net surrender value). Although life insurance tax 
reserves require the use of a Federally prescribed method, 
interest rate, and mortality or morbidity table, changes in 
other assumptions for computing statutory reserves (e.g., when 
premiums are collected and claims are paid) may cause increases 
or decreases in a company's life insurance reserves that must 
be spread over a 10-year period. Changes in the net surrender 
value of a contract are not subject to the 10-year spread 
because, apart from its use as a minimum in determining the 
amount of life insurance tax reserves, the net surrender value 
is not a reserve but a current liability.
---------------------------------------------------------------------------
    \971\Sec. 807(f).
---------------------------------------------------------------------------
      If for any taxable year the taxpayer is not a life 
insurance company, the balance of any adjustments to reserves 
is taken into account for the preceding taxable year.

                               HOUSE BILL

      Income or loss resulting from a change in method of 
computing life insurance company reserves is taken into account 
consistent with IRS procedures, generally ratably over a four-
year period, instead of over a 10-year period.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
5. Repeal of special rule for distributions to shareholders from pre-
        1984 policyholders surplus account (sec. 3705 of the House 
        bill, sec. 13514 of the Senate amendment, and sec. 815 of the 
        Code)

                         PRESENT AND PRIOR LAW

      Under the law in effect from 1959 through 1983, a life 
insurance company was subject to a three-phase taxable income 
computation under Federal tax law. Under the three-phase 
system, a company was taxed on the lesser of its gain from 
operations or its taxable investment income (Phase I) and, if 
its gain from operations exceeded its taxable investment 
income, 50 percent of such excess (Phase II). Federal income 
tax on the other 50 percent of the gain from operations was 
deferred, and was accounted for as part of a policyholder's 
surplus account and, subject to certain limitations, taxed only 
when distributed to stockholders or upon corporate dissolution 
(Phase III). To determine whether amounts had been distributed, 
a company maintained a shareholders surplus account, which 
generally included the company's previously taxed income that 
would be available for distribution to shareholders. 
Distributions to shareholders were treated as being first out 
of the shareholders surplus account, then out of the 
policyholders surplus account, and finally out of other 
accounts.
      The Deficit Reduction Act of 1984\972\ included 
provisions that, for 1984 and later years, eliminated further 
deferral of tax on amounts (described above) that previously 
would have been deferred under the three-phase system. Although 
for taxable years after 1983, life insurance companies may not 
enlarge their policyholders surplus account, the companies are 
not taxed on previously deferred amounts unless the amounts are 
treated as distributed to shareholders or subtracted from the 
policyholders surplus account.\973\
---------------------------------------------------------------------------
    \972\Pub. L. No. 98-369.
    \973\Sec. 815.
---------------------------------------------------------------------------
      Any direct or indirect distribution to shareholders from 
an existing policyholders surplus account of a stock life 
insurance company is subject to tax at the corporate rate in 
the taxable year of the distribution. Present law (like prior 
law) provides that any distribution to shareholders is treated 
as made (1) first out of the shareholders surplus account, to 
the extent thereof, (2) then out of the policyholders surplus 
account, to the extent thereof, and (3) finally, out of other 
accounts.
      For taxable years beginning after December 31, 2004, and 
before January 1, 2007, the application of the rules imposing 
income tax on distributions to shareholders from the 
policyholders surplus account of a life insurance company were 
suspended. Distributions in those years were treated as first 
made out of the policyholders surplus account, to the extent 
thereof, and then out of the shareholders surplus account, and 
lastly out of other accounts.

                               HOUSE BILL

      The provision repeals section 815, the rules imposing 
income tax on distributions to shareholders from the 
policyholders surplus account of a stock life insurance 
company.
      In the case of any stock life insurance company with an 
existing policyholders surplus account (as defined in section 
815 before its repeal), tax is imposed on the balance of the 
account as of December 31, 2017. A life insurance company is 
required to pay tax on the balance of the account ratably over 
the first eight taxable years beginning after December 31, 
2017. Specifically, the tax imposed on a life insurance company 
is the tax on the sum of life insurance company taxable income 
for the taxable year (but not less than zero) plus 1/8 of the 
balance of the existing policyholders surplus account as of 
December 31, 2017. Thus, life insurance company losses are not 
allowed to offset the amount of the policyholders surplus 
account balance subject to tax.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
6. Modification of proration rules for property and casualty insurance 
        companies (sec. 3706 of the House bill, sec. 13515 of the 
        Senate amendment, and sec. 832 of the Code)

                              PRESENT LAW

      The taxable income of a property and casualty insurance 
company is determined as the sum of its gross income from 
underwriting income and investment income (as well as gains and 
other income items), reduced by allowable deductions.
      A proration rule applies to property and casualty 
insurance companies. In calculating the deductible amount of 
its reserve for losses incurred, a property and casualty 
insurance company must reduce the amount of losses incurred by 
15 percent of (1) the insurer's tax-exempt interest, (2) the 
deductible portion of dividends received (with special rules 
for dividends from affiliates), and (3) the increase for the 
taxable year in the cash value of life insurance, endowment, or 
annuity contracts the company owns.\974\ This proration rule 
reflects the fact that reserves are generally funded in part 
from tax-exempt interest, from deductible dividends, and from 
other untaxed amounts.
---------------------------------------------------------------------------
    \974\Sec. 832(b)(5).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision replaces the 15-percent reduction under 
present law with a 26.25-percent reduction under the proration 
rule for property and casualty insurance companies. This change 
in the percentage takes into account the reduction in the 
corporate tax rate from 35 to 20 percent under section 3001 of 
the bill (reduction in corporate tax rate).
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The provision replaces the 15-percent reduction under 
present law with a reduction equal to 5.25 percent divided by 
the top corporate tax rate. For 2018, the top corporate tax 
rate is 35 percent, and the percentage reduction is 15 percent. 
For 2019 and thereafter, the corporate tax rate is 20 percent, 
and the percentage reduction is 26.25 percent under the 
proration rule for property and casualty insurance companies. 
The proration percentage will be automatically adjusted in the 
future if the top corporate tax rate is changed, so that the 
product of the proration percentage and the top corporate tax 
rate always equals 5.25 percent.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment. 
The top corporate tax rate is 21 percent for 2018 and 
thereafter,\975\ so the percentage reduction is 25 percent 
under the proration rule for property and casualty insurance 
companies.
---------------------------------------------------------------------------
    \975\See Part II.A.1 (Reduction in corporate tax rate).
---------------------------------------------------------------------------
7. Modification of discounting rules for property and casualty 
        insurance companies (sec. 3707 of the House bill and sec. 832 
        of the Code)

                              PRESENT LAW

      A property and casualty insurance company generally is 
subject to tax on its taxable income.\976\ The taxable income 
of a property and casualty insurance company is determined as 
the sum of its underwriting income and investment income (as 
well as gains and other income items), reduced by allowable 
deductions.\977\ Among the items that are deductible in 
calculating underwriting income are additions to reserves for 
losses incurred and expenses incurred.
---------------------------------------------------------------------------
    \976\Sec. 831(a).
    \977\Sec. 832.
---------------------------------------------------------------------------
      To take account of the time value of money, discounting 
of unpaid losses is required. All property and casualty loss 
reserves (unpaid losses and unpaid loss adjustment expenses) 
for each line of business (as shown on the annual statement) 
are required to be discounted for Federal income tax purposes.
      The discounted reserves are calculated using a prescribed 
interest rate which is based on the applicable Federal mid-term 
rate (``mid-term AFR''). The discount rate is the average of 
the mid-term AFRs effective at the beginning of each month over 
the 60-month period preceding the calendar year for which the 
determination is made.
      To determine the period over which the reserves are 
discounted, a prescribed loss payment pattern applies. The 
prescribed length of time is either the accident year and the 
following three calendar years, or the accident year and the 
following 10 calendar years, depending on the line of business. 
In the case of certain ``long-tail'' lines of business, the 10-
year period is extended, but not by more than five additional 
years. Thus, present law limits the maximum duration of any 
loss payment pattern to the accident year and the following 15 
years. The Treasury Department is directed to determine a loss 
payment pattern for each line of business by reference to the 
historical loss payment pattern for that line of business using 
aggregate experience reported on the annual statements of 
insurance companies, and is required to make this determination 
every five years, starting with 1987.
      Under the discounting rules, an election is provided 
permitting a taxpayer to use its own (rather than an industry-
wide) historical loss payment pattern with respect to all lines 
of business, provided that applicable requirements are met.
      Treasury publishes discount factors for each line of 
business to be applied by taxpayers for discounting 
reserves.\978\ The discount factors are published annually, 
based on (1) the interest rate applicable to the calendar year, 
and (2) the loss payment pattern for each line of business as 
determined every five years.
---------------------------------------------------------------------------
    \978\The most recent property and casualty reserve discount factors 
published by Treasury are in Rev. Proc. 2016-58, 2016-51 I.R.B. 839, 
and see Rev. Proc. 2012-44, 2012-49 I.R.B. 645.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision modifies the reserve discounting rules 
applicable to property and casualty insurance companies. In 
general, the provision modifies the prescribed interest rate, 
extends the periods applicable under the loss payment pattern, 
and repeals the election to use a taxpayer's historical loss 
payment pattern.
Interest rate
      The provision provides that the interest rate is an 
annual rate for any calendar year to be determined by Treasury 
based on the corporate bond yield curve (rather than the mid-
term AFR as under present law). For this purpose, the corporate 
bond yield curve means, with respect to any month, a yield 
curve that reflects the average, for the preceding 24-month 
period, of monthly yields on investment grade corporate bonds 
with varying maturities and that are in the top three quality 
levels available.\979\ Because the corporate bond yield curve 
provides for 24-month averaging, the present-law rule providing 
for 60-month averaging to determine the interest rate is 
repealed under the provision. It is expected that Treasury will 
determine a 24-month average for the 24 months preceding the 
first month of the calendar year for which the determination is 
made.
---------------------------------------------------------------------------
    \979\This rule adopts the definition found in section 
430(h)(2)(D)(i) of the term ``corporate bond yield curve.'' Section 
430, which relates to minimum funding standards for single-employer 
defined benefit pension plans, includes other rules for determining an 
``effective interest rate,'' such as segment rate rules. The term 
``effective interest rate'' along with these other rules, including the 
segment rate rules, do not apply for purposes of property and casualty 
insurance reserve discounting.
---------------------------------------------------------------------------
Loss payment patterns
      The provision extends the periods applicable for 
determining loss payment patterns. Under the provision, the 
maximum duration of the loss payment pattern is determined by 
the amount of losses remaining unpaid using aggregate industry 
experience for each line of business, rather than by a set 
number of years as under present law.
      Like present law, the provision provides that Treasury 
determines a loss payment pattern for each line of business by 
reference to the historical loss payment pattern for that line 
of business using aggregate experience reported on the annual 
statements of insurance companies, and is required to make this 
determination every five years.
      Under the provision, the present-law three-year and 10-
year periods following the accident year are extended up to a 
maximum of 15 more years for the lines of business to which 
each period applies. For lines of business to which the three-
year period applies, the amount of losses that would have been 
treated as paid in the third year after the accident year is 
treated as paid in that year and each subsequent year in an 
amount equal to the average of the amounts treated as paid in 
the first and second years (or, if less, the remaining amount). 
To the extent these unpaid losses have not been treated as paid 
before the 18th year after the accident year, they are treated 
as paid in that 18th year.
      Similarly, for lines of business to which the 10-year 
period applies, the amount of losses that would have been 
treated as paid in the 10th year following the accident year is 
treated as paid in that year and each subsequent year in an 
amount equal to the average of the amounts treated as paid in 
the seventh, eighth, and ninth years (or if less, the remaining 
amount). To the extent these unpaid losses have not been 
treated as paid before the 25th year after the accident year, 
they are treated as paid in that 25th year.
      The provision repeals the present-law rule providing that 
in the case of certain ``long-tail'' lines of business, the 10-
year period is extended, but not by more than five additional 
years. The provision does not change the lines of business to 
which the three-year, and 10-year, periods, respectively, 
apply.
Election to use own historical loss payment pattern
      The provision repeals the present-law election permitting 
a taxpayer to use its own (rather than an aggregate industry-
experience-based) historical loss payment pattern with respect 
to all lines of business.
      Effective date.--The provision generally applies to 
taxable years beginning after December 31, 2017. Under a 
transitional rule for the first taxable year beginning in 2018, 
the amount of unpaid losses and expenses unpaid (under section 
832(b)(5)(B) and (6)) and the unpaid losses (under sections 
807(c)(2) and 805(a)(1)) at the end of the preceding taxable 
year are determined as if the provision had applied to these 
items in such preceding taxable year, using the interest rate 
and loss payment patterns for accident years ending with 
calendar year 2018. Any adjustment is spread over eight taxable 
years, i.e., is included in the taxpayer's gross income ratably 
in the first taxable year beginning in 2018 and the seven 
succeeding taxable years. For taxable years subsequent to the 
first taxable year beginning in 2018, the provision applies to 
such unpaid losses and expenses unpaid (i.e., unpaid losses and 
expenses unpaid at the end of the taxable year preceding the 
first taxable year beginning in 2018) by using the interest 
rate and loss payment patterns applicable to accident years 
ending with calendar year 2018.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill with 
modifications. The corporate bond yield curve means, with 
respect to any month, a yield curve that reflects the average, 
for the preceding 60-month period (not 24-month period), of 
monthly yields on investment grade corporate bonds with varying 
maturities and that are in the top three quality levels 
available. The present-law three-year period for discounting 
certain lines of business other than long-tail lines of 
business is not modified under the conference agreement. The 
present-law 10-year period for certain long tail lines of 
business is extended for a maximum of 14 more years (instead of 
15 more years as under the House bill). The present-law 
election permitting a taxpayer to use its own (rather than an 
aggregate industry-experience-based) historical loss payment 
pattern is repealed.
      Effective date.--The provision generally applies to 
taxable years beginning after December 31, 2017. Under a 
transitional rule for the first taxable year beginning in 2018, 
the amount of unpaid losses and expenses unpaid (under section 
832(b)(5)(B) and (6)) and the unpaid losses (under sections 
807(c)(2) and 805(a)(1)) at the end of the preceding taxable 
year are determined as if the provision had applied to these 
items in such preceding taxable year, using the interest rate 
and loss payment patterns for accident years ending with 
calendar year 2018. Any adjustment is spread over eight taxable 
years, i.e., is included in the taxpayer's gross income ratably 
in the first taxable year beginning in 2018 and the seven 
succeeding taxable years. For taxable years subsequent to the 
first taxable year beginning in 2018, the provision applies to 
such unpaid losses and expenses unpaid (i.e., unpaid losses and 
expenses unpaid at the end of the taxable year preceding the 
first taxable year beginning in 2018) by using the interest 
rate and loss payment patterns applicable to accident years 
ending with calendar year 2018.
8. Repeal of special estimated tax payments (sec. 3708 of the House 
        bill, sec. 13516 of the Senate amendment, and sec. 847 of the 
        Code)

                              PRESENT LAW

Allowance of additional deduction and establishment of special loss 
        discount account
      Present law allows an insurance company required to 
discount its reserves an additional deduction that is not to 
exceed the excess of (1) the amount of the undiscounted unpaid 
losses over (2) the amount of the related discounted unpaid 
losses, to the extent the amount was not deducted in a 
preceding taxable year.\980\ The provision imposes the 
requirement that a special loss discount account be established 
and maintained, and that special estimated tax payments be 
made. Unused amounts of special estimated tax payments are 
treated as a section 6655 estimated tax payment for the 16th 
year after the year for which the special estimated tax payment 
was made.
---------------------------------------------------------------------------
    \980\Sec. 847.
---------------------------------------------------------------------------
      The total payments by a taxpayer, including section 6655 
estimated tax payments and other tax payments, together with 
special estimated tax payments made under this provision, are 
generally the same as the total tax payments that the taxpayer 
would make if the taxpayer did not elect to have this provision 
apply, except to the extent amounts can be refunded under the 
provision in the 16th year.
Calculation of special estimated tax payments based on tax benefit 
        attributable to deduction
      More specifically, present law imposes a requirement that 
the taxpayer make special estimated tax payments in an amount 
equal to the tax benefit attributable to the additional 
deduction allowed under the provision. If amounts are included 
in gross income as a result of a reduction in the taxpayer's 
special loss discount account or the liquidation or termination 
of the taxpayer's insurance business, and an additional tax is 
due for any year as a result of the inclusion, then an amount 
of the special estimated tax payments equal to such additional 
tax is applied against such additional tax. If there is an 
adjustment reducing the amount of additional tax against which 
the special estimated tax payment was applied, then in lieu of 
any credit or refund for the reduction, a special estimated tax 
payment is treated as made in an amount equal to the amount 
that would otherwise be allowable as a credit or refund.
      The amount of the tax benefit attributable to the 
deduction is to be determined (under Treasury regulations 
(which have not been promulgated)) by taking into account tax 
benefits that would arise from the carryback of any net 
operating loss for the year as well as current year benefits. 
In addition, tax benefits for the current and carryback years 
are to take into account the benefit of filing a consolidated 
return with another insurance company without regard to the 
consolidation limitations imposed by section 1503(c).
      The taxpayer's estimated tax payments under section 6655 
are to be determined without regard to the additional deduction 
allowed under this provision and the special estimated tax 
payments. Legislative history\981\ indicates that it is 
intended that the taxpayer may apply the amount of an 
overpayment of any section 6655 estimated tax payments for the 
taxable year against the amount of the special estimated tax 
payment required under this provision. The special estimated 
tax payments under this provision are not treated as estimated 
tax payments for purposes of section 6655 (e.g., for purposes 
of calculating penalties or interest on underpayments of 
estimated tax) when such special estimated tax payments are 
made.
---------------------------------------------------------------------------
    \981\See H.R. Rep. No. 100-1104, Conference Report to accompany 
H.R. 4333, the Technical and Miscellaneous Revenue Act of 1988, October 
21, 1988, p. 174.
---------------------------------------------------------------------------
Refundable amount
      To the extent that a special estimated tax payment is not 
used to offset additional tax due for any of the first 15 
taxable years beginning after the year for which the payment 
was made, such special estimated tax payment is treated as an 
estimated tax payment made under section 6655 for the 16th year 
after the year for which the special estimated tax payment was 
made. If the amount of such deemed section 6655 payment, 
together with the taxpayer's other payments credited against 
tax liability for such 16th year, exceeds the tax liability for 
such year, then the excess (up to the amount of the deemed 
section 6655 payment) may be refunded to the taxpayer to the 
same extent provided under present law with respect to 
overpayments of tax.
Regulatory authority
      In addition to the regulatory authority to adjust the 
amount of special estimated tax payments in the event of a 
change in the corporate tax rate, authority is provided to 
Treasury to prescribe regulations necessary or appropriate to 
carry out the purposes of the provision.
      Such regulations include those providing for the separate 
application of the provision with respect to each accident 
year. Separate application of the provision with respect to 
each accident year (i.e., applying a vintaging methodology) may 
be appropriate under regulations to determine the amount of tax 
liability for any taxable year against which special estimated 
tax payments are applied, and to determine the amount (if any) 
of special estimated tax payments remaining after the 15th year 
which may be available to be refunded to the taxpayer.
      Regulatory authority is also provided to make such 
adjustments in the application of the provision as may be 
necessary to take into account the corporate alternative 
minimum tax. Under this regulatory authority, rules similar to 
those applicable in the case of a change in the corporate tax 
rate are intended to apply to determine the amount of special 
estimated tax payments that may be applied against tax 
calculated at the corporate alternative minimum tax rate. The 
special estimated tax payments are not treated as payments of 
regular tax for purposes of determining the taxpayer's 
alternative minimum tax liability.
      Regulations have not been promulgated under section 847.

                               HOUSE BILL

      The provision repeals section 847. Thus, the election to 
apply section 847, the additional deduction, special loss 
discount account, special estimated tax payment, and refundable 
amount rules of present law are eliminated.
      The entire balance of an existing account is included in 
income of the taxpayer for the first taxable year beginning 
after 2017, and the entire amount of existing special estimated 
tax payments are applied against the amount of additional tax 
attributable to this inclusion. Any special estimated tax 
payments in excess of this amount are treated as estimated tax 
payments under section 6655.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
9. Computation of life insurance tax reserves (sec. 13517 of the Senate 
        amendment and sec. 807 of the Code)

                              PRESENT LAW

In general
      In determining life insurance company taxable income, a 
life insurance company includes in gross income any net 
decrease in reserves, and deducts a net increase in 
reserves.\982\ Methods for determining reserves for tax 
purposes generally are based on reserves prescribed by the 
National Association of Insurance Commissioners for purposes of 
financial reporting under State regulatory rules.
---------------------------------------------------------------------------
    \982\Sec. 807.
---------------------------------------------------------------------------
      In computing the net increase or net decrease in 
reserves, six items are taken into account. These are (1) life 
insurance reserves; (2) unearned premiums and unpaid losses 
included in total reserves; (3) amounts that are discounted at 
interest to satisfy obligations under insurance and annuity 
contracts that do not involve life, accident, or health 
contingencies when the computation is made; (4) dividend 
accumulations and other amounts held at interest in connection 
with insurance and annuity contracts; (5) premiums received in 
advance and liabilities for premium deposit funds; and (6) 
reasonable special contingency reserves under contracts of 
group term life insurance or group accident and health 
insurance that are held for retired lives, premium 
stabilization, or a combination of both.
      Life insurance reserves for any contract are the greater 
of the net surrender value of the contract or the reserves 
determined under Federally prescribed rules, but may not exceed 
the statutory reserve with respect to the contract (for 
regulatory reporting). In computing the Federally prescribed 
reserve for any type of contract, the taxpayer must use the tax 
reserve method applicable to the contract, an interest rate for 
discounting of reserves to take account of the time value of 
money, and the prevailing commissioners' standard tables for 
mortality or morbidity.
Interest rate
      The assumed interest rate to be used in computing the 
Federally prescribed reserve is the greater of the applicable 
Federal interest rate or the prevailing State assumed interest 
rate. The applicable Federal interest rate is the annual rate 
determined by the Secretary under the discounting rules for 
property and casualty reserves for the calendar year in which 
the contract is issued. The prevailing State assumed interest 
rate is generally the highest assumed interest rate permitted 
to be used in at least 26 States in computing life insurance 
reserves for insurance or annuity contracts of that type as of 
the beginning the calendar year in which the contract is 
issued. In determining the highest assumed rates permitted in 
at least 26 States, each State is treated as permitting the use 
of every rate below its highest rate.
      A one-time election is permitted (revocable only with the 
consent of the Secretary) to apply an updated applicable 
Federal interest rate every five years in calculating life 
insurance reserves. The election is provided to take account of 
the fluctuations in market rates of return that companies 
experience with respect to life insurance contracts of long 
duration. The use of the updated applicable Federal interest 
rate under the election does not cause the recalculation of 
life insurance reserves for any prior year. Under the election 
no change is made to the interest rate used in determining life 
insurance reserves if the updated applicable Federal interest 
rate is less than one-half of one percentage point different 
from the rate used by the company in calculating life insurance 
reserves during the preceding five years.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides that for purposes of determining 
the deduction for increases in certain reserves of a life 
insurance company, the amount of the life insurance reserves 
for any contract (other than certain variable contracts) is the 
greater of (1) the net surrender value of the contract (if 
any), or (2) 92.87 percent of the amount determined using the 
tax reserve method otherwise applicable to the contract as of 
the date the reserve is determined. In the case of a variable 
contract, the amount of life insurance reserves for the 
contract is the sum of (1) the greater of (a) the net surrender 
value of the contract, or (b) the separate-account reserve 
amount under section 817 for the contract, plus (2) 92.87 
percent of the excess (if any) of the amount determined using 
the tax reserve method otherwise applicable to the contract as 
of the date the reserve is determined over the amount 
determined in (1). In no event shall the reserves exceed the 
amount which would be taken into account in determining 
statutory reserves. No amount or item shall be taken into 
account more than once in determining any reserve. As under 
present law, no deduction for asset adequacy or deficiency 
reserves is allowed. The amount of life insurance reserves may 
not exceed the annual statement reserves. The provision 
provides reserve rules for supplemental benefits and retains 
present-law rules regarding certain contracts issued by foreign 
branches of domestic life insurance companies.
      Effective date.--The proposal applies to taxable years 
beginning after December 31, 2017. For the first taxable year 
beginning after December 31, 2017, the difference in the amount 
of the reserve with respect to any contract at the end of the 
preceding taxable year and the amount of such reserve 
determined as if the proposal had applied for that year is 
taken into account for each of the eight taxable years 
following that preceding year, one-eighth per year.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
except that, instead of 92.87 percent, the percentage relating 
to the statutory reserve is 92.81 percent. More specifically, 
the provision provides that for purposes of determining the 
deduction for increases in certain reserves of a life insurance 
company, the amount of the life insurance reserves for any 
contract (other than certain variable contracts) is the greater 
of (1) the net surrender value of the contract (if any), or (2) 
92.81 percent of the amount determined using the tax reserve 
method otherwise applicable to the contract as of the date the 
reserve is determined. In the case of a variable contract, the 
amount of life insurance reserves for the contract is the sum 
of (1) the greater of (a) the net surrender value of the 
contract, or (b) the separate-account reserve amount under 
section 817 for the contract, plus (2) 92.81 percent of the 
excess (if any) of the amount determined using the tax reserve 
method otherwise applicable to the contract as of the date the 
reserve is determined over the amount determined in (1). In no 
event shall the reserves exceed the amount which would be taken 
into account in determining statutory reserves. As under 
present law, no deduction for asset adequacy or deficiency 
reserves is allowed.
      The amount of life insurance reserves may not exceed the 
annual statement reserves. A no-double-counting rule provides 
that no amount or item is taken into account more than once in 
determining any reserve under subchapter L of the Code. For 
example, an amount taken into account in determining a loss 
reserve under section 807 may not be taken into account again 
in determining a loss reserve under section 832. Similarly, a 
loss reserve determined under the tax reserve method (whether 
the Commissioners Reserve Valuation Method, the Commissioner's 
Annuity Reserve Valuation Method, a principles-based reserve 
method, or another method developed in the future, that is 
prescribed for a type of contract by the National Association 
of Insurance Commissioners) may not again be taken into account 
in determining the portion of the reserve that is separately 
accounted for under section 817 or be included also in 
determining the net surrender value of a contract.
      The provision provides reserve rules for supplemental 
benefits and retains present-law rules regarding certain 
contracts issued by foreign branches of domestic life insurance 
companies. The provision requires the Secretary to provide for 
reporting (at such time and in such manner as the Secretary 
shall prescribe) with respect to the opening balance and 
closing balance or reserves and with respect to the method of 
computing reserves for purposes of determining income. For this 
purpose, the Secretary may require that a life insurance 
company (including an affiliated group filing a consolidated 
return that includes a life insurance company) is required to 
report each of the line item elements of each separate account 
by combining them with each such item from all other separate 
accounts and the general account, and to report the combined 
amounts on a line-by-line basis on the taxpayer's return. 
Similarly, the Secretary may in such guidance provide that 
reporting on a separate account by separate account basis is 
generally not permitted. Under existing regulatory authority, 
if the Secretary determines it is necessary in order to carry 
out and enforce this provision, the Secretary may require e-
filing or comparable filing of the return on magnetic medial or 
other machine readable form, and may require that the taxpayer 
provide its annual statement via a link, electronic copy, or 
other similar means.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017. For the first taxable year 
beginning after December 31, 2017, the difference in the amount 
of the reserve with respect to any contract at the end of the 
preceding taxable year and the amount of such reserve 
determined as if the proposal had applied for that year is 
taken into account for each of the eight taxable years 
following that preceding year, one-eighth per year.
10. Modification of rules for life insurance proration for purposes of 
        determining the dividends received deduction (sec. 13518 of the 
        Senate amendment and sec. 812 of the Code)

                              PRESENT LAW

Reduction of reserve deduction and dividends received deduction to 
        reflect untaxed income
      A life insurance company is subject to proration rules in 
calculating life insurance company taxable income.
      The proration rules reduce the company's deductions, 
including reserve deductions and dividends received deductions, 
if the life insurance company has tax-exempt income, deductible 
dividends received, or other similar untaxed income items, 
because deductible reserve increases can be viewed as being 
funded proportionately out of taxable and tax-exempt income.
      Under the proration rules, the net increase and net 
decrease in reserves are computed by reducing the ending 
balance of the reserve items by the policyholders' share of 
tax-exempt interest.\983\
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    \983\Secs. 807(a)(2)(B) and (b)(1)(B).
---------------------------------------------------------------------------
      Similarly, under the proration rules, a life insurance 
company is allowed a dividends-received deduction for 
intercorporate dividends from nonaffiliates only in proportion 
to the company's share of such dividends,\984\ but not for the 
policyholders' share. Fully deductible dividends from 
affiliates are excluded from the application of this proration 
formula, if such dividends are not themselves distributions 
from tax-exempt interest or from dividend income that would not 
be fully deductible if received directly by the taxpayer. In 
addition, the proration rule includes in prorated amounts the 
increase for the taxable year in policy cash values of life 
insurance policies and annuity and endowment contracts.
---------------------------------------------------------------------------
    \984\Secs. 805(a)(4), 812.
---------------------------------------------------------------------------
Company's share and policyholder's share
      The life insurance company proration rules provide that 
the company's share, for this purpose, means the percentage 
obtained by dividing the company's share of the net investment 
income for the taxable year by the net investment income for 
the taxable year.\985\ Net investment income means 95 percent 
of gross investment income, in the case of assets held in 
segregated asset accounts under variable contracts, and 90 
percent of gross investment income in other cases.\986\
---------------------------------------------------------------------------
    \985\Sec. 812(a).
    \986\Sec. 812(c).
---------------------------------------------------------------------------
      Gross investment income includes specified items.\987\ 
The specified items include interest (including tax-exempt 
interest), dividends, rents, royalties and other related 
specified items, short-term capital gains, and trade or 
business income. Gross investment income does not include gain 
(other than short-term capital gain to the extent it exceeds 
net long-term capital loss) that is, or is considered as, from 
the sale or exchange of a capital asset. Gross investment 
income also does not include the appreciation in the value of 
assets that is taken into account in computing the company's 
tax reserve deduction under section 817.
---------------------------------------------------------------------------
    \987\Sec. 812(d).
---------------------------------------------------------------------------
      The company's share of net investment income, for 
purposes of this calculation, is the net investment income for 
the taxable year, reduced by the sum of (a) the policy interest 
for the taxable year and (b) a portion of policyholder 
dividends.\988\ Policy interest is defined to include required 
interest at the greater of the prevailing State assumed rate or 
the applicable Federal rate (plus some other interest items). 
Present law provides that in any case where neither the 
prevailing State assumed interest rate nor the applicable 
Federal rate is used, ``another appropriate rate'' is used for 
this calculation. No statutory definition of ``another 
appropriate rate'' is provided; the law is unclear as to what 
rate or rates are appropriate for this purpose.\989\
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    \988\Sec. 812(b)(1). This portion is defined as gross investment 
income's share of policyholder dividends.
    \989\Legislative history of section 812 mentions that the general 
concept that items of investment yield should be allocated between 
policyholders and the company was retained from prior law. H. Rep. 98-
861, Conference Report to accompany H.R. 4170, the Deficit Reduction 
Act of 1984, 98th Cong., 2d Sess., 1065 (June 23, 1984). This concept 
is referred to in Joint Committee on Taxation, General Explanation of 
the Revenue Provisions of the Deficit Reduction Act of 1984, JCS-41-84, 
December 31, 1984, p. 622, stating, ``[u]nder the Act, the formula used 
for purposes of determining the policyholders' share is based generally 
on the proration formula used under prior law in computing gain or loss 
from operations (i.e., by reference to `required interest').'' This may 
imply that a reference to pre-1984-law regulations may be appropriate. 
See Rev. Rul. 2003-120, 2003-2 C.B. 1154, and Technical Advice 
Memoranda 20038008 and 200339049.
---------------------------------------------------------------------------
      In 2007, the IRS issued Rev. Rul. 2007-54,\990\ 
interpreting required interest under section 812(b) to be 
calculated by multiplying the mean of a contract's beginning-
of-year and end-of-year reserves by the greater of the 
applicable Federal interest rate or the prevailing State 
assumed interest rate, for purposes of determining separate 
account reserves for variable contracts. However, Rev. Rul. 
2007-54 was suspended by Rev. Rul. 2007-61, in which the IRS 
and the Treasury Department stated that the issues would more 
appropriately be addressed by regulation.\991\ No regulations 
have been issued to date.
---------------------------------------------------------------------------
    \990\2007-38 I.R.B. 604.
    \991\2007-42 I.R.B. 799.
---------------------------------------------------------------------------
General account and separate accounts
      A variable contract is generally a life insurance (or 
annuity) contract whose death benefit (or annuity payout) 
depends explicitly on the investment return and market value of 
underlying assets.\992\ The investment risk is generally that 
of the policyholder, not the insurer. The assets underlying 
variable contracts are maintained in separate accounts held by 
life insurers. These separate accounts are distinct from the 
insurer's general account in which it maintains assets 
supporting products other than variable contracts.
---------------------------------------------------------------------------
    \992\Section 817(d) provides a more detailed definition of a 
variable contract.
---------------------------------------------------------------------------
Reserves
      For Federal income tax purposes, a life insurance company 
includes in gross income any net decrease in reserves, and 
deducts a net increase in reserves.\993\ Methods for 
determining reserves for tax purposes generally are based on 
reserves prescribed by the National Association of Insurance 
Commissioners for purposes of financial reporting under State 
regulatory rules.
---------------------------------------------------------------------------
    \993\Sec. 807.
---------------------------------------------------------------------------
      For purposes of determining the amount of the tax 
reserves for variable contracts, however, a special rule 
eliminates gains and losses. Under this rule,\994\ in 
determining reserves for variable contracts, realized and 
unrealized gains are subtracted, and realized and unrealized 
losses are added, whether or not the assets have been disposed 
of. The basis of assets in the separate account is increased to 
reflect appreciation, and reduced to reflect depreciation in 
value, that are taken into account in computing reserves for 
such contracts.
---------------------------------------------------------------------------
    \994\Sec. 817.
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Dividends received deduction
      A corporate taxpayer may partially or fully deduct 
dividends received.\995\ The percentage of the allowable 
dividends received deduction depends on the percentage of the 
stock of the distributing corporation that the recipient 
corporation owns.
---------------------------------------------------------------------------
    \995\Sec. 243 et seq. Conceptually, dividends received by a 
corporation are retained in corporate solution; these amounts are taxed 
when distributed to noncorporate shareholders.
---------------------------------------------------------------------------
            Limitation on dividends received deduction under section 
                    246(c)(4)
      The dividends received deduction is not allowed with 
respect to stock either (1) held for 45 days or less during a 
91-day period beginning 45 days before the ex-dividend date, or 
(2) to the extent the taxpayer is under an obligation to make 
related payments with respect to positions in substantially 
similar or related property.\996\ The taxpayer's holding period 
is reduced for periods during which its risk of loss is 
reduced.\997\
---------------------------------------------------------------------------
    \996\Sec. 246(c).
    \997\Sec. 246(c)(4). For this purpose, the holding period is 
reduced for periods in which (1) the taxpayer has an obligation to sell 
or has shorted substantially similar stock; (2) the taxpayer has 
granted an option to buy substantially similar stock; or (3) under 
Treasury regulations, the taxpayer has diminished its risk of loss by 
holding other positions with respect to substantially similar or 
related property.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision modifies the life insurance company 
proration rule for reducing dividends received deductions and 
reserve deductions with respect to untaxed income. For purposes 
of the life insurance proration rule of section 805(a)(4), the 
company's share is 70 percent. The policyholder's share is 30 
percent.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
11. Capitalization of certain policy acquisition expenses (sec. 13519 
        of the Senate amendment and sec. 848 of the Code)

                              PRESENT LAW

      In the case of an insurance company, specified policy 
acquisition expenses for any taxable year are required to be 
capitalized, and generally are amortized over the 120-month 
period beginning with the first month in the second half of the 
taxable year.\998\
---------------------------------------------------------------------------
    \998\Sec. 848.
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      A special rule provides for 60-month amortization of the 
first $5 million of specified policy acquisition expenses with 
a phase-out. The phase-out reduces the amount amortized over 60 
months by the excess of the insurance company's specified 
policy acquisition expenses for the taxable year over $10 
million.
      Specified policy acquisition expenses are determined as 
that portion of the insurance company's general deductions for 
the taxable year that does not exceed a specific percentage of 
the net premiums for the taxable year on each of three 
categories of insurance contracts. For annuity contracts, the 
percentage is 1.75; for group life insurance contracts, the 
percentage is 2.05; and for all other specified insurance 
contracts, the percentage is 7.7.
      With certain exceptions, a specified insurance contract 
is any life insurance, annuity, or noncancellable accident and 
health insurance contract or combination thereof. A group life 
insurance contract is any life insurance contract that covers a 
group of individuals defined by reference to employment 
relationship, membership in an organization, or similar factor, 
the premiums for which are determined on a group basis, and the 
proceeds of which are payable to (or for the benefit of) 
persons other than the employer of the insured, an organization 
to which the insured belongs, or other similar person.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision extends the amortization period for 
specified policy acquisition expenses from a 120-month period 
to the 180-month period beginning with the first month in the 
second half of the taxable year. The provision does not change 
the special rule providing for 60-month amortization of the 
first $5 million of specified policy acquisition expenses (with 
phaseout). The provision provides that for annuity contracts, 
the percentage is 2.1 percent; for group life insurance 
contracts, the percentage is 2.46 percent; and for all other 
specified insurance contracts, the percentage is 9.24 percent.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with modifications. Under the conference agreement, the 
amortization period is 180 months. For annuity contracts, the 
percentage is 2.09 percent; for group life insurance contracts, 
the percentage is 2.45 percent; and for all other specified 
insurance contracts, the percentage is 9.20 percent.
12. Tax reporting for life settlement transactions, clarification of 
        tax basis of life insurance contracts, and exception to 
        transfer for valuable consideration rules (secs. 13518 through 
        13520 of the Senate amendment and secs. 101, 1016, and 6050X of 
        the Code)

                              PRESENT LAW

      An exclusion from Federal income tax is provided for 
amounts received under a life insurance contract paid by reason 
of the death of the insured.\999\
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    \999\Sec. 101(a)(1). In the case of certain accelerated death 
benefits and viatical settlements, special rules treat certain amounts 
as amounts paid by reason of the death of an insured (that is, 
generally, excludable from income). Sec. 101(g). The rules relating to 
accelerated death benefits provide that amounts treated as paid by 
reason of the death of the insured include any amount received under a 
life insurance contract on the life of an insured who is a terminally 
ill individual, or who is a chronically ill individual (provided 
certain requirements are met). For this purpose, a terminally ill 
individual is one who has been certified by a physician as having an 
illness or physical condition which can reasonably be expected to 
result in death in 24 months or less after the date of the 
certification. A chronically ill individual is one who has been 
certified by a licensed health care practitioner within the preceding 
12-month period as meeting certain ability-related requirements. In the 
case of a viatical settlement, if any portion of the death benefit 
under a life insurance contract on the life of an insured who is 
terminally ill or chronically ill is sold to a viatical settlement 
provider, the amount paid for the sale or assignment of that portion is 
treated as an amount paid under the life insurance contract by reason 
of the death of the insured (that is, generally, excludable from 
income). For this purpose, a viatical settlement provider is a person 
regularly engaged in the trade or business of purchasing, or taking 
assignments of, life insurance contracts on the lives of terminally ill 
or chronically ill individuals (provided certain requirements are met).
---------------------------------------------------------------------------
      Under rules known as the transfer for value rules, if a 
life insurance contract is sold or otherwise transferred for 
valuable consideration, the amount paid by reason of the death 
of the insured that is excludable generally is limited.\1000\ 
Under the limitation, the excludable amount may not exceed the 
sum of (1) the actual value of the consideration, and (2) the 
premiums or other amounts subsequently paid by the transferee 
of the contract. Thus, for example, if a person buys a life 
insurance contract, and the consideration he pays combined with 
his subsequent premium payments on the contract are less than 
the amount of the death benefit he later receives under the 
contract, then the difference is includable in the buyer's 
income.
---------------------------------------------------------------------------
    \1000\Sec. 101(a)(2).
---------------------------------------------------------------------------
      Exceptions are provided to the limitation on the 
excludable amount. The limitation on the excludable amount does 
not apply if (1) the transferee's basis in the contract is 
determined in whole or in part by reference to the transferor's 
basis in the contract,\1001\ or (2) the transfer is to the 
insured, to a partner of the insured, to a partnership in which 
the insured is a partner, or to a corporation in which the 
insured is a shareholder or officer.\1002\
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    \1001\Sec. 101(a)(2)(A).
    \1002\Sec. 101(a)(2)(B).
---------------------------------------------------------------------------
      IRS guidance sets forth more details of the tax treatment 
of a life insurance policyholder who sells or surrenders the 
life insurance contract and the tax treatment of other sellers 
and of buyers of life insurance contracts. The guidance relates 
to the character of taxable amounts (ordinary or capital) and 
to the taxpayer's basis in the life insurance contract.
      In Revenue Ruling 2009-13,\1003\ the IRS ruled that 
income recognized under section 72(e) on surrender to the life 
insurance company of a life insurance contract with cash value 
is ordinary income. In the case of sale of a cash value life 
insurance contract, the IRS ruled that the insured's (seller's) 
basis is reduced by the cost of insurance, and the gain on sale 
of the contract is ordinary income to the extent of the amount 
that would be recognized as ordinary income if the contract 
were surrendered (the ``inside buildup''), and any excess is 
long-term capital gain. Gain on the sale of a term life 
insurance contract (without cash surrender value) is long-term 
capital gain under the ruling.
---------------------------------------------------------------------------
    \1003\2009-21 I.R.B. 1029.
---------------------------------------------------------------------------
      In Revenue Ruling 2009-14,\1004\ the IRS ruled that under 
the transfer for value rules, a portion of the death benefit 
received by a buyer of a life insurance contract on the death 
of the insured is includable as ordinary income. The portion is 
the excess of the death benefit over the consideration and 
other amounts (e.g., premiums) paid for the contract. Upon sale 
of the contract by the purchaser of the contract, the gain is 
long-term capital gain, and in determining the gain, the basis 
of the contract is not reduced by the cost of insurance.
---------------------------------------------------------------------------
    \1004\2009-21 I.R.B. 1031.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      The provision imposes reporting requirements in the case 
of the purchase of an existing life insurance contract in a 
reportable policy sale and imposes reporting requirements on 
the payor in the case of the payment of reportable death 
benefits. The provision sets forth rules for determining the 
basis of a life insurance or annuity contract. Lastly, the 
provision modifies the transfer for value rules in a transfer 
of an interest in a life insurance contract in a reportable 
policy sale.
Reporting requirements for acquisitions of life insurance contracts
            Reporting upon acquisition of life insurance contract
      The reporting requirement applies to every person who 
acquires a life insurance contract, or any interest in a life 
insurance contract, in a reportable policy sale during the 
taxable year. A reportable policy sale means the acquisition of 
an interest in a life insurance contract, directly or 
indirectly, if the acquirer has no substantial family, 
business, or financial relationship with the insured (apart 
from the acquirer's interest in the life insurance contract). 
An indirect acquisition includes the acquisition of an interest 
in a partnership, trust, or other entity that holds an interest 
in the life insurance contract.
      Under the reporting requirement, the buyer reports 
information about the purchase to the IRS, to the insurance 
company that issued the contract, and to the seller. The 
information reported by the buyer about the purchase is (1) the 
buyer's name, address, and taxpayer identification number 
(``TIN''), (2) the name, address, and TIN of each recipient of 
payment in the reportable policy sale, (3) the date of the 
sale, (4) the name of the issuer, and (5) the amount of each 
payment. The statement the buyer provides to any issuer of a 
life insurance contract is not required to include the amount 
of the payment or payments for the purchase of the contract.
            Reporting of seller's basis in the life insurance contract
      On receipt of a report described above, or on any notice 
of the transfer of a life insurance contract to a foreign 
person, the issuer is required to report to the IRS and to the 
seller (1)) the name, address, and TIN of the seller or the 
transferor to a foreign person, (2) the basis of the contract 
(i.e., the investment in the contract within the meaning of 
section 72(e)(6)), and (3) the policy number of the contract. 
Notice of the transfer of a life insurance contract to a 
foreign person is intended to include any sort of notice, 
including information provided for nontax purposes such as 
change of address notices for purposes of sending statements or 
for other purposes, or information relating to loans, premiums, 
or death benefits with respect to the contract.
            Reporting with respect to reportable death benefits
      When a reportable death benefit is paid under a life 
insurance contract, the payor insurance company is required to 
report information about the payment to the IRS and to the 
payee. Under this reporting requirement, the payor reports (1) 
the name, address and TIN of the person making the payment, (2) 
the name, address, and TIN of each recipient of a payment, (3) 
the date of each such payment, (4) the gross amount of the 
payment (5) the payor's estimate of the buyer's basis in the 
contract. A reportable death benefit means an amount paid by 
reason of the death of the insured under a life insurance 
contract that has been transferred in a reportable policy sale.
      For purposes of these reporting requirements, a payment 
means the amount of cash and the fair market value of any 
consideration transferred in a reportable policy sale.
Determination of basis
      The provision provides that in determining the basis of a 
life insurance or annuity contract, no adjustment is made for 
mortality, expense, or other reasonable charges incurred under 
the contract (known as ``cost of insurance''). This reverses 
the position of the IRS in Revenue Ruling 2009-13 that on sale 
of a cash value life insurance contract, the insured's 
(seller's) basis is reduced by the cost of insurance.
Scope of transfer for value rules
      The provision provides that the exceptions to the 
transfer for value rules do not apply in the case of a transfer 
of a life insurance contract, or any interest in a life 
insurance contract, in a reportable policy sale. Thus, some 
portion of the death benefit ultimately payable under such a 
contract may be includable in income.
      Effective date.--Under the provision, the reporting 
requirement is effective for reportable policy sales occurring 
after December 31, 2017, and reportable death benefits paid 
after December 31, 2017. The clarification of the basis rules 
for life insurance and annuity contracts is effective for 
transactions entered into after August 25, 2009. The 
modification of exception to the transfer for value rules is 
effective for transfers occurring after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

                         I. Compensation\1005\

1. Modification of limitation on excessive employee remuneration (sec. 
        3801 of the House bill, sec. 13601 of the Senate amendment, and 
        sec. 162(m) of the Code)

                              PRESENT LAW

In general
      An employer generally may deduct reasonable compensation 
for personal services as an ordinary and necessary business 
expense. Section 162(m) provides an explicit limitation on the 
deductibility of compensation expenses in the case of publicly 
traded corporate employers. The otherwise allowable deduction 
for compensation with respect to a covered employee of a 
publicly held corporation\1006\ is limited to no more than $1 
million per year.\1007\ The deduction limitation applies when 
the deduction attributable to the compensation would otherwise 
be taken.
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    \1005\Provisions relating to retirement plans are discussed in Part 
I.E.
    \1006\A corporation is treated as publicly held if it has a class 
of common equity securities that is required to be registered under 
section 12 of the Securities Exchange Act of 1934. Section 162(m)(2).
    \1007\Sec. 162(m). This deduction limitation applies for purposes 
of the regular income tax and the alternative minimum tax.
---------------------------------------------------------------------------
Covered employees
      Section 162(m) defines a covered employee as (1) the 
chief executive officer of the corporation (or an individual 
acting in such capacity) as of the close of the taxable year 
and (2) any employee whose total compensation is required to be 
reported to shareholders under the Securities Exchange Act of 
1934 (``Exchange Act'') by reason of being among the 
corporation's four most highly compensated officers for the 
taxable year (other than the chief executive officer).\1008\ 
Treasury regulations under section 162(m) provide that whether 
an employee is the chief executive officer or among the four 
most highly compensated officers should be determined pursuant 
to the executive compensation disclosure rules promulgated 
under the Exchange Act.
---------------------------------------------------------------------------
    \1008\Sec. 162(m)(3).
---------------------------------------------------------------------------
      In 2006, the Securities and Exchange Commission amended 
certain rules relating to executive compensation, including 
which officers' compensation must be disclosed under the 
Exchange Act. Under the new rules, such officers are (1) the 
principal executive officer (or an individual acting in such 
capacity), (2) the principal financial officer (or an 
individual acting in such capacity), and (3) the three most 
highly compensated officers, other than the principal executive 
officer or principal financial officer.
      In response to the Securities and Exchange Commission's 
new disclosure rules, the Internal Revenue Service issued 
updated guidance on identifying which employees are covered by 
section 162(m).\1009\ The new guidance provides that ``covered 
employee'' means any employee who is (1) as of the close of the 
taxable year, the principal executive officer (or an individual 
acting in such capacity) defined in reference to the Exchange 
Act, or (2) among the three most highly compensated 
officers\1010\ for the taxable year (other than the principal 
executive officer or principal financial officer), again 
defined by reference to the Exchange Act. Thus, under current 
guidance, only four employees are covered under section 162(m) 
for any taxable year. Under Treasury regulations, the 
requirement that the individual meet the criteria as of the 
last day of the taxable year applies to both the principal 
executive officer and the three highest compensated 
officers.\1011\
---------------------------------------------------------------------------
    \1009\Notice 2007-49, 2007-25 I.R.B. 1429.
    \1010\By reason of being among the officers whose total 
compensation is required to be reported to shareholders under the 
Securities Exchange Act of 1934.
    \1011\Treas. Reg. sec. 1.162-27(c)(2).
---------------------------------------------------------------------------
Definition of publicly held corporation
      For purposes of the deduction disallowance of section 
162(m), a publicly held corporation means any corporation 
issuing any class of common equity securities required to be 
registered under section 12 of the Securities Exchange Act of 
1934.\1012\ All U.S. publicly traded companies are subject to 
this registration requirement, including their foreign 
affiliates. A foreign company publicly traded through American 
depository receipts (``ADRs'') is also subject to this 
registration requirement if more than 50 percent of the 
issuer's outstanding voting securities are held, directly or 
indirectly, by residents of the United States and either (i) 
the majority of the executive officers or directors are United 
States citizens or residents, (ii) more than 50 percent of the 
assets of the issuer are located in the United States, or (iii) 
the business of the issuer is administered principally in the 
United States. Other foreign companies are not subject to the 
registration requirement.
---------------------------------------------------------------------------
    \1012\Sec. 162(m)(2).
---------------------------------------------------------------------------
Remuneration subject to the deduction limitation
            In general
      Unless specifically excluded, the deduction limitation 
applies to all remuneration for services, including cash and 
the cash value of all remuneration (including benefits) paid in 
a medium other than cash. If an individual is a covered 
employee for a taxable year, the deduction limitation applies 
to all compensation not explicitly excluded from the deduction 
limitation, regardless of whether the compensation is for 
services as a covered employee and regardless of when the 
compensation was earned. The $1 million cap is reduced by 
excess parachute payments (as defined in section 280G) that are 
not deductible by the corporation.\1013\
---------------------------------------------------------------------------
    \1013\Sec. 162(m)(4)(F).
---------------------------------------------------------------------------
      Certain types of compensation are not subject to the 
deduction limit and are not taken into account in determining 
whether other compensation exceeds $1 million. The following 
types of compensation are not taken into account: (1) 
remuneration payable on a commission basis\1014\; (2) 
remuneration payable solely on account of the attainment of one 
or more performance goals if certain outside director and 
shareholder approval requirements are met (``performance-based 
compensation'')\1015\; (3) payments to a tax-favored retirement 
plan (including salary reduction contributions); (4) amounts 
that are excludable from the executive's gross income (such as 
employer-provided health benefits and miscellaneous fringe 
benefits\1016\); and (5) any remuneration payable under a 
written binding contract which was in effect on February 17, 
1993. In addition, remuneration does not include compensation 
for which a deduction is allowable after a covered employee 
ceases to be a covered employee. Thus, the deduction limitation 
often does not apply to deferred compensation that is otherwise 
subject to the deduction limitation (e.g., is not performance-
based compensation) because the payment of compensation is 
deferred until after termination of employment.
---------------------------------------------------------------------------
    \1014\Sec. 162(m)(4)(B).
    \1015\Sec. 162(m)(4)(C).
    \1016\Secs. 105, 106, and 132.
---------------------------------------------------------------------------
            Performance-based compensation
      Compensation qualifies for the exception for performance-
based compensation only if (1) it is paid solely on account of 
the attainment of one or more performance goals, (2) the 
performance goals are established by a compensation committee 
consisting solely of two or more outside directors,\1017\ (3) 
the material terms under which the compensation is to be paid, 
including the performance goals, are disclosed to and approved 
by the shareholders in a separate majority-approved vote prior 
to payment, and (4) prior to payment, the compensation 
committee certifies that the performance goals and any other 
material terms were in fact satisfied.
---------------------------------------------------------------------------
    \1017\A director is considered an outside director if he or she is 
not a current employee of the corporation (or related entities), is not 
a former employee of the corporation (or related entities) who is 
receiving compensation for prior services (other than benefits under a 
qualified retirement plan), was not an officer of the corporation (or 
related entities) at any time, and is not currently receiving 
compensation for personal services in any capacity (e.g., for services 
as a consultant) other than as a director.
---------------------------------------------------------------------------
      Compensation (other than stock options or other stock 
appreciation rights (``SARs'')) is not treated as paid solely 
on account of the attainment of one or more performance goals 
unless the compensation is paid to the particular executive 
pursuant to a pre-established objective performance formula or 
standard that precludes discretion. A stock option or SAR with 
an exercise price not less than the fair market value, on the 
date the option or SAR is granted, of the stock subject to the 
option or SAR, generally is treated as meeting the exception 
for performance-based compensation, provided that the 
requirements for outside director and shareholder approval are 
met (without the need for certification that the performance 
standards have been met). This is the case because the amount 
of compensation attributable to the options or SARs received by 
the executive is based solely on an increase in the 
corporation's stock price. Stock-based compensation is not 
treated as performance-based if it depends on factors other 
than corporate performance.

                               HOUSE BILL

Definition of covered employee
      The provision revises the definition of covered employee 
to include both the principal executive officer and the 
principal financial officer. Further, an individual is a 
covered employee if the individual holds one of these positions 
at any time during the taxable year. The provision also defines 
as a covered employee the three (rather than four) most highly 
compensated officers for the taxable year (other than the 
principal executive officer or principal financial officer) who 
are required to be reported on the company's proxy statement 
(i.e., the statement required pursuant to executive 
compensation disclosure rules promulgated under the Exchange 
Act) for the taxable year (or who would be required to be 
reported on such a statement for a company not required to make 
such a report to shareholders). This includes such officers of 
a corporation not required to file a proxy statement but which 
otherwise falls within the revised definition of a publicly 
held corporation, as well as such officers of a publicly traded 
corporation that would otherwise have been required to file a 
proxy statement for the year (for example, but for the fact 
that the corporation delisted its securities or underwent a 
transaction that resulted in the nonapplication of the proxy 
statement requirement).
      In addition, if an individual is a covered employee with 
respect to a corporation for a taxable year beginning after 
December 31, 2016, the individual remains a covered employee 
for all future years. Thus, an individual remains a covered 
employee with respect to compensation otherwise deductible for 
subsequent years, including for years during which the 
individual is no longer employed by the corporation and years 
after the individual has died. Compensation does not fail to be 
compensation with respect to a covered employee and thus 
subject to the deduction limit for a taxable year merely 
because the compensation is includible in the income of, or 
paid to, another individual, such as compensation paid to a 
beneficiary after the employee's death, or to a former spouse 
pursuant to a domestic relations order.
Definition of publicly held corporation
      The provision extends the applicability of section 162(m) 
to include all domestic publicly traded corporations and all 
foreign companies publicly traded through ADRs. The proposed 
definition may include certain additional corporations that are 
not publicly traded, such as large private C or S corporations.
Performance-based compensation and commissions exceptions
      The provision eliminates the exceptions for commissions 
and performance-based compensation from the definition of 
compensation subject to the deduction limit. Thus, such 
compensation is taken into account in determining the amount of 
compensation with respect to a covered employee for a taxable 
year that exceeds $1 million and is thus not deductible under 
section 162.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill, except that 
it adds a transition rule for remuneration which is provided 
pursuant to a written binding contract which was in effect on 
November 2, 2017 and which was not modified in any material 
respect on or after such date.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017. A transition rule applies to 
remuneration which is provided pursuant to a written binding 
contract which was in effect on November 2, 2017 and which was 
not modified in any material respect on or after such date.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment. 
For purposes of the transition rule, compensation paid pursuant 
to a plan qualifies for this exception provided that the right 
to participate in the plan is part of a written binding 
contract with the covered employee in effect on November 2, 
2017. For example, suppose a covered employee was hired by XYZ 
Corporation on October 2, 2017 and one of the terms of the 
written employment contract is that the executive is eligible 
to participate in the `XYZ Corporation Executive Deferred 
Compensation Plan' in accordance with the terms of the plan. 
Assume further that the terms of the plan provide for 
participation after 6 months of employment, amounts payable 
under the plan are not subject to discretion, and the 
corporation does not have the right to amend materially the 
plan or terminate the plan (except on a prospective basis 
before any services are performed with respect to the 
applicable period for which such compensation is to be paid). 
Provided that the other conditions of the binding contract 
exception are met (e.g., the plan itself is in writing), 
payments under the plan are grandfathered, even though the 
employee was not actually a participant in the plan on November 
2, 2017.\1018\
---------------------------------------------------------------------------
    \1018\As discussed in the text below, the grandfather ceases to 
apply if the plan is materially amended.
---------------------------------------------------------------------------
      The fact that a plan was in existence on November 2, 2017 
is not by itself sufficient to qualify the plan for the 
exception for binding written contracts.
      The exception for remuneration paid pursuant to a binding 
written contract ceases to apply to amounts paid after there 
has been a material modification to the terms of the contract. 
The exception does not apply to new contracts entered into or 
renewed after November 2, 2017. For purposes of this rule, any 
contract that is entered into on or before November 2, 2017 and 
that is renewed after such date is treated as a new contract 
entered into on the day the renewal takes effect. A contract 
that is terminable or cancelable unconditionally at will by 
either party to the contract without the consent of the other, 
or by both parties to the contract, is treated as a new 
contract entered into on the date any such termination or 
cancellation, if made, would be effective. However, a contract 
is not treated as so terminable or cancelable if it can be 
terminated or cancelled only by terminating the employment 
relationship of the covered employee.
2. Excise tax on excess tax-exempt organization executive compensation 
        (sec. 3802 of the House bill, sec. 13602 of the Senate 
        amendment, and sec. 4960 of the Code)

                              PRESENT LAW

      Taxable employers and other service recipients generally 
may deduct reasonable compensation expenses.\1019\ However, in 
some cases, compensation in excess of specific levels is not 
deductible.
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    \1019\Sec. 162(a)(1).
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      A publicly held corporation generally cannot deduct more 
than $1 million of compensation (that is not compensation 
otherwise excepted from this limit) in a taxable year for each 
``covered employee.''\1020\ For this purpose, a covered 
employee is the corporation's principal executive officer (or 
an individual acting in such capacity) defined in reference to 
the Securities Exchange Act of 1934 (``Exchange Act'') as of 
the close of the taxable year, or any employee whose total 
compensation is required to be reported to shareholders under 
the Exchange Act by reason of being among the corporation's 
three most highly compensated officers for the taxable year 
(other than the principal executive officer or principal 
financial officer).\1021\
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    \1020\Sec. 162(m)(1). Under section 162(m)(6), limits apply to 
deductions for compensation of individuals performing services for 
certain health insurance providers.
    \1021\Notice 2007-49, 2007-2 I.R.B. 1429.
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      Unless an exception applies, generally a corporation 
cannot deduct that portion of the aggregate present value of a 
``parachute payment'' which equals or exceeds three times the 
``base amount'' of certain service providers. The nondeductible 
excess is an ``excess parachute payment.''\1022\ A parachute 
payment is generally a payment of compensation that is 
contingent on a change in corporate ownership or control made 
to certain officers, shareholders, and highly compensated 
individuals.\1023\ An individual's base amount is the average 
annualized compensation includible in the individual's gross 
income for the five taxable years ending before the date on 
which the change in ownership or control occurs.\1024\ Certain 
amounts are not considered parachute payments, including 
payments under a qualified retirement plan, a simplified 
employee pension plan, or a simple retirement account.\1025\
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    \1022\Sec. 280G(a) and (b)(1).
    \1023\Sec. 280G(b)(2) and (c).
    \1024\Sec. 280G(b)(3).
    \1025\Secs. 401(a), 403(a), 408(k), and 408(p).
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      These deduction limits generally do not affect a tax-
exempt organization.

                               HOUSE BILL

      Under the provision, an employer is liable for an excise 
tax equal to 20 percent of the sum of (1) any remuneration 
(other than an excess parachute payment) in excess of $1 
million paid to a covered employee by an applicable tax-exempt 
organization for a taxable year, and (2) any excess parachute 
payment (under a new definition for this purpose that relates 
solely to separation pay) paid by the applicable tax-exempt 
organization to a covered employee. Accordingly, the excise tax 
applies as a result of an excess parachute payment, even if the 
covered employee's remuneration does not exceed $1 million.
      For purposes of the provision, a covered employee is an 
employee (including any former employee) of an applicable tax-
exempt organization if the employee is one of the five highest 
compensated employees of the organization for the taxable year 
or was a covered employee of the organization (or a 
predecessor) for any preceding taxable year beginning after 
December 31, 2016. An ``applicable tax-exempt organization'' is 
an organization exempt from tax under section 501(a), an exempt 
farmers' cooperative,\1026\ a Federal, State or local 
governmental entity with excludable income,\1027\ or a 
political organization.\1028\
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    \1026\Sec. 521(b).
    \1027\Sec. 115(1).
    \1028\Sec. 527(e)(1).
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      Remuneration means wages as defined for income tax 
withholding purposes,\1029\ but does not include any designated 
Roth contribution.\1030\ Remuneration of a covered employee 
includes any remuneration paid with respect to employment of 
the covered employee by any person or governmental entity 
related to the applicable tax-exempt organization. A person or 
governmental entity is treated as related to an applicable tax-
exempt organization if the person or governmental entity (1) 
controls, or is controlled by, the organization, (2) is 
controlled by one or more persons that control the 
organization, (3) is a supported organization\1031\ during the 
taxable year with respect to the organization, (4) is a 
supporting organization\1032\ during the taxable year with 
respect to the organization, or (5) in the case of a voluntary 
employees' beneficiary association (``VEBA''),\1033\ 
establishes, maintains, or makes contributions to the VEBA. 
However, remuneration of a covered employee that is not 
deductible by reason of the $1 million limit on deductible 
compensation is not taken into account for purposes of the 
provision.
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    \1029\Sec. 3401(a).
    \1030\Under section 402A(c), a designated Roth contribution is an 
elective deferral (that is, a contribution to a tax-favored employer-
sponsored retirement plan made at the election of an employee) that the 
employee designates as not being excludable from income.
    \1031\Sec. 509(f)(3).
    \1032\Sec. 509(a)(3).
    \1033\Sec. 501(c)(9).
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      Under the provision, an excess parachute payment is the 
amount by which any parachute payment exceeds the portion of 
the base amount allocated to the payment. A parachute payment 
is a payment in the nature of compensation to (or for the 
benefit of) a covered employee if the payment is contingent on 
the employee's separation from employment and the aggregate 
present value of all such payments equals or exceeds three 
times the base amount. The base amount is the average 
annualized compensation includible in the covered employee's 
gross income for the five taxable years ending before the date 
of the employee's separation from employment. Parachute 
payments do not include payments under a qualified retirement 
plan, a simplified employee pension plan, a simple retirement 
account, a tax-deferred annuity,\1034\ or an eligible deferred 
compensation plan of a State or local government 
employer.\1035\
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    \1034\Sec. 403(b).
    \1035\Sec. 457(b).
---------------------------------------------------------------------------
      The employer of a covered employee is liable for the 
excise tax. If remuneration of a covered employee from more 
than one employer is taken into account in determining the 
excise tax, each employer is liable for the tax in an amount 
that bears the same ratio to the total tax as the remuneration 
paid by that employer bears to the remuneration paid by all 
employers to the covered employee.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except that remuneration is treated as paid when there is no 
substantial risk of forfeiture of the rights to such 
remuneration. In addition, the definition of remuneration for 
this purpose includes amounts required to be included in gross 
income under section 457(f).\1036\
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    \1036\Sec. 457(f) applies to an ``ineligible'' deferred 
compensation plan of a State or local government or a tax-exempt 
employer (that is, a plan that does not meet the requirements to be an 
eligible plan under section 457(b)). Under an ineligible plan, deferred 
amounts are treated as nonqualified deferred compensation and 
includible in income for the first taxable year in which there is no 
substantial risk of forfeiture of the rights to such compensation. For 
this purpose, a person's rights to compensation are subject to a 
substantial risk of forfeiture if the rights are conditioned on the 
future performance of substantial services by any individual. Earnings 
post-vesting are generally taxed when paid.
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                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with modifications. Under the conference agreement, the tax 
rate is equal to corporate tax rate, which is 21 percent under 
the conference agreement. In addition, for purposes of the 
requirement to treat remuneration as paid when the rights to 
the remuneration are no longer subject to a substantial risk of 
forfeiture, the conference agreement clarifies that 
``substantial risk of forfeiture'' is based on the definition 
under section 457(f)(3)(B) which applies to ineligible deferred 
compensation subject to section 457(f). Accordingly, the tax 
imposed by this provision can apply to the value of 
remuneration that is vested (and any increases in such value or 
vested remuneration) under this definition, even if it is not 
yet received.
      The conference agreement exempts compensation paid to 
employees who are not highly compensated employees (within the 
meaning of section 414(q)) from the definition of parachute 
payment, and also exempts compensation attributable to medical 
services of certain qualified medical professionals from the 
definitions of remuneration and parachute payment. For purposes 
of determining a covered employee, remuneration paid to a 
licensed medical professional which is directly related to the 
performance of medical or veterinary services by such 
professional is not taken into account, whereas remuneration 
paid to such a professional in any other capacity is taken into 
account. A medical professional for this purpose includes a 
doctor, nurse, or veterinarian.
3. Treatment of qualified equity grants (sec. 3803 of the House bill, 
        sec. 13603 of the Senate amendment, and secs. 83, 3401, and 
        6051 of the Code)

                              PRESENT LAW

Income tax treatment of employer stock transferred to an employee
      Specific rules apply to property, including employer 
stock, transferred to an employee in connection with the 
performance of services.\1037\ These rules govern the amount 
and timing of income inclusion by the employee and the amount 
and timing of the employer's compensation deduction.
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    \1037\Sec. 83. Section 83 applies generally to transfers of any 
property, not just employer stock, in connection with the performance 
of services by any service provider, not just an employee. However, the 
provision described herein applies only with respect to certain 
employer stock transferred to employees.
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      Under these rules, an employee generally must recognize 
income in the taxable year in which the employee's right to the 
stock is transferable or is not subject to a substantial risk 
of forfeiture, whichever occurs earlier (referred to herein as 
``substantially vested''). Thus, if the employee's right to the 
stock is substantially vested when the stock is transferred to 
the employee, the employee recognizes income in the taxable 
year of such transfer, in an amount equal to the fair market 
value of the stock as of the date of transfer (less any amount 
paid for the stock). If at the time the stock is transferred to 
the employee, the employee's right to the stock is not 
substantially vested (referred to herein as ``nonvested''), the 
employee does not recognize income attributable to the stock 
transfer until the taxable year in which the employee's right 
becomes substantially vested. In this case, the amount 
includible in the employee's income is the fair market value of 
the stock as of the date that the employee's right to the stock 
is substantially vested (less any amount paid for the stock). 
However, if the employee's right to the stock is nonvested at 
the time the stock is transferred to employee, under section 
83(b), the employee may elect within 30 days of transfer to 
recognize income in the taxable year of transfer, referred to 
as a ``section 83(b)'' election.\1038\ If a proper and timely 
election under section 83(b) is made, the amount of 
compensatory income is capped at the amount equal to the fair 
market value of the stock as of the date of transfer (less any 
amount paid for the stock). A section 83(b) election is 
available with respect to grants of ``restricted stock'' 
(nonvested stock), and does not generally apply to the grant of 
options.
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    \1038\Under Treas. Reg. sec. 1.83-2, the employee makes an election 
by filing with the Internal Revenue Service a written statement that 
includes the fair market value of the property at the time of transfer 
and the amount (if any) paid for the property. The employee must also 
provide a copy of the statement to the employer.
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      In general, an employee's right to stock or other 
property is subject to a substantial risk of forfeiture if the 
employee's right to full enjoyment of the property is subject 
to a condition, such as the future performance of substantial 
services.\1039\ An employee's right to stock or other property 
is transferable if the employee can transfer an interest in the 
property to any person other than the transferor of the 
property.\1040\ Thus, generally, employer stock transferred to 
an employee by an employer is not transferable merely because 
the employee can sell it back to the employer.
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    \1039\See section 83(c)(1) and Treas. Reg. sec. 1.83-3(c) for the 
definition of substantial risk of forfeiture.
    \1040\Treas. Reg. sec. 1.83-3(d). In addition, under section 
83(c)(2), the right to stock is transferable only if any transferee's 
right to the stock would not be subject to a substantial risk of 
forfeiture.
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      In the case of stock transferred to an employee, the 
employer is allowed a deduction (to the extent a deduction for 
a business expense is otherwise allowable) equal to the amount 
included in the employee's income as a result of transfer of 
the stock.\1041\ The employer deduction generally is permitted 
in the employer's taxable year in which or with which ends the 
employee's taxable year when the amount is included and 
properly reported in the employee's income.\1042\
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    \1041\Sec. 83(h).
    \1042\Treas. Reg. sec. 1.83-6.
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      These rules do not apply to the grant of a nonqualified 
option on employer stock unless the option has a readily 
ascertainable fair market value.\1043\ Instead, these rules 
apply to the transfer of employer stock by the employee on 
exercise of the option. That is, if the right to the stock is 
substantially vested on transfer (the time of exercise), income 
recognition applies for the taxable year of transfer. If the 
right to the stock is nonvested on transfer, the timing of 
income inclusion is determined under the rules applicable to 
the transfer of nonvested stock. In either case, the amount 
includible in income by the employee is the fair market value 
of the stock as of the required time of income inclusion, less 
the exercise price paid by the employee. A section 83(b) 
election generally does not apply to the grant of options. If 
upon the exercise of an option, nonvested stock is transferred 
to the employee, a section 83(b) election may apply. The 
employer's deduction is generally determined under the rules 
that apply to transfers of restricted stock, but a special 
accrual rule may apply under Treasury regulations when the 
transferred stock is substantially vested.\1044\
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    \1043\See section 83(e)(3) and Treas. Reg. sec. 1.83-7. A 
nonqualified option is an option on employer stock that is not a 
statutory option, discussed below.
    \1044\Treas. Reg. sec. 1.83-6(a)(3).
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Employment taxes and reporting
      Employment taxes generally consist of taxes under the 
Federal Insurance Contributions Act (``FICA''), tax under the 
Federal Unemployment Tax Act (``FUTA''), and income taxes 
required to be withheld by employers from wages paid to 
employees (``income tax withholding'').\1045\ Unless an 
exception applies under the applicable rules, compensation 
provided to an employee constitutes wages subject to these 
taxes.
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    \1045\Secs. 3101-3128 (FICA), 3301-3311 (FUTA), and 3401-3404 
(income tax withholding). Instead of FICA taxes, railroad employers and 
employees are subject, under the Railroad Retirement Tax Act 
(``RRTA''), sections 3201-3241, to taxes equivalent to FICA taxes with 
respect to compensation as defined for RRTA purposes. Sections 3501-
3510 provide additional rules relating to all these taxes.
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      FICA imposes tax on employers and employees, generally 
based on the amount of wages paid to an employee during the 
year. Special rules as to the timing and amount of FICA taxes 
apply in the case of nonqualified deferred compensation, as 
defined for FICA purposes.\1046\
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    \1046\Sec. 3121(v); Treas. Reg. sec. 31.3121(v)(2).
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      The tax imposed on the employer and on the employee is 
each composed of two parts: (1) the Social Security or old age, 
survivors, and disability insurance (``OASDI'') tax equal to 
6.2 percent of covered wages up to the OASDI wage base 
($127,200 for 2017); and (2) the Medicare or hospital insurance 
(``HI'') tax equal to 1.45 percent of all covered wages.\1047\ 
The employee portion of FICA tax generally must be withheld 
and, along with the employer portion, remitted to the Federal 
government by the employer. FICA tax withholding applies 
regardless of whether compensation is provided in the form of 
cash or a noncash form, such as a transfer of property 
(including employer stock) or in-kind benefits.\1048\
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    \1047\The employee portion of the HI tax under FICA (not the 
employer portion) is increased by an additional tax of 0.9 percent on 
wages received in excess of a threshold amount. The threshold amount is 
$250,000 in the case of a joint return, $125,000 in the case of a 
married individual filing a separate return, and $200,000 in any other 
case.
    \1048\Under section 3501(b), employment taxes with respect to 
noncash fringe benefits are to be collected (or paid) by the employer 
at the time and in the manner prescribed by the Secretary of the 
Treasury (``Treasury''). Announcement 85-113, 1985-31 I.R.B. 31, 
provides guidance on the application of employment taxes with respect 
to noncash fringe benefits.
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      FUTA imposes a tax on employers of six percent of wages 
up to the FUTA wage base of $7,000.
      Income tax withholding generally applies when wages are 
paid by an employer to an employee, based on graduated 
withholding rates set out in tables published by the Internal 
Revenue Service (``IRS'').\1049\ Like FICA tax withholding, 
income tax withholding applies regardless of whether 
compensation is provided in the form of cash or a noncash form, 
such as a transfer of property (including employer stock) or 
in-kind benefits.
---------------------------------------------------------------------------
    \1049\Sec. 3402. Specific withholding rates apply in the case of 
supplemental wages.
---------------------------------------------------------------------------
      An employer is required to furnish each employee with a 
statement of compensation information for a calendar year, 
including taxable compensation, FICA wages, and withheld income 
and FICA taxes.\1050\ In addition, information relating to 
certain nontaxable items must be reported, such as certain 
retirement and health plan contributions. The statement, made 
on Form W-2, Wage and Tax Statement, must be provided to each 
employee by January 31 of the succeeding year.\1051\
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    \1050\Secs. 6041 and 6051.
    \1051\Employers send Form W-2 information to the Social Security 
Administration, which records information relating to Social Security 
and Medicare and forwards the Form W-2 information to the IRS. 
Employees include a copy of Form W-2 with their income tax returns.
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Statutory options
      Two types of statutory options apply with respect to 
employer stock: incentive stock options (``ISOs'') and options 
provided under an employee stock purchase plan 
(``ESPP'').\1052\ Stock received pursuant to a statutory option 
is subject to special rules, rather than the rules for 
nonqualified options, discussed above. No amount is includible 
in an employee's income on the grant, vesting, or exercise of a 
statutory option.\1053\ In addition, generally no deduction is 
allowed to the employer with respect to the option or the stock 
transferred to an employee.
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    \1052\Sections 421-424 govern statutory options. Section 423(b)(5) 
requires that, under the terms of an ESPP, all employees granted 
options generally must have the same rights and privileges.
    \1053\ Under section 56(b)(3), this income tax treatment with 
respect to stock received on exercise of an ISO does not apply for 
purposes of the alternative minimum tax under section 55.
---------------------------------------------------------------------------
      If a holding requirement is met with respect to the stock 
transferred on exercise of a statutory option and the employee 
later disposes of the stock, the employee's gain generally is 
treated as capital gain rather than ordinary income. Under the 
holding requirement, the employee must not dispose of the stock 
within two years after the date the option is granted and also 
must not dispose of the stock within one year after the date 
the option is exercised. If a disposition occurs before the end 
of the required holding period (a ``disqualifying 
disposition''), the employee recognizes ordinary income in the 
taxable year in which the disqualifying disposition occurs and 
the employer may be allowed a corresponding deduction in the 
taxable year in which such disposition occurs. The amount of 
ordinary income recognized when a disqualifying disposition 
occurs generally equals the fair market value of the stock on 
the date of exercise (that is, when the stock was transferred 
to the employee) less the exercise price paid.
      Employment taxes do not apply with respect to the grant 
or vesting of a statutory option, transfer of stock pursuant to 
the option, or a disposition (including a disqualifying 
disposition) of the stock.\1054\ However, certain special 
reporting requirements apply.
---------------------------------------------------------------------------
    \1054\Secs. 3121(a)(22), 3306(b)(19), and the last sentence of 
section 421(b).
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Nonqualified deferred compensation
      Compensation is generally includible in an employee's 
income when paid to the employee. However, in the case of a 
nonqualified deferred compensation plan,\1055\ unless the 
arrangement either is exempt from or meets the requirements of 
section 409A, the amount of deferred compensation is first 
includible in income for the taxable year when not subject to a 
substantial risk of forfeiture (as defined\1056\), even if 
payment will not occur until a later year.\1057\ In general, to 
meet the requirements of section 409A, the time when 
nonqualified deferred compensation will be paid, as well as the 
amount, must be specified at the time of deferral with limits 
on further deferral after the time for payment. Various other 
requirements apply, including that payment can only occur on 
specific defined events.
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    \1055\Compensation earned by an employee is generally paid to the 
employee shortly after being earned. However, in some cases, payment is 
deferred to a later period, referred to as ``deferred compensation.'' 
Deferred compensation may be provided through a plan that receives tax-
favored treatment, such as a qualified retirement plan under section 
401(a). Deferred compensation provided through a plan that is not 
eligible for tax-favored treatment is referred to as ``nonqualified'' 
deferred compensation.
    \1056\Treas. Reg. sec. 1.409A-1(d).
    \1057\Section 409A and the regulations thereunder provide rules for 
nonqualified deferred compensation. Compensation that fails to meet the 
requirements of section 409A is also subject to an additional income 
tax of 20% on amounts includible in income and a potential interest 
factor tax (``409A taxes''). Section 409A and the additional 409A taxes 
apply to increases in the value of the failed compensation each year 
until it is paid.
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      Various exemptions from section 409A apply, including 
transfers of property subject to section 83.\1058\ Nonqualified 
options are not automatically exempt from section 409A, but may 
be structured so as not to be considered nonqualified deferred 
compensation.\1059\ A restricted stock unit (``RSU'') is a term 
used for an arrangement under which an employee has the right 
to receive at a specified time in the future an amount 
determined by reference to the value of one or more shares of 
employer stock. An employee's right to receive the future 
amount may be subject to a condition, such as continued 
employment for a certain period or the attainment of certain 
performance goals. The payment to the employee of the amount 
due under the arrangement is referred to as settlement of the 
RSU. The arrangement may provide for the settlement amount to 
be paid in cash or as a transfer of employer stock (or either). 
An arrangement providing RSUs is generally considered a 
nonqualified deferred compensation plan and is subject to the 
rules, including the limits, of section 409A. The employer 
deduction generally is permitted in the employer's taxable year 
in which or with which ends the employee's taxable year when 
the amount is included and properly reported in the employee's 
income.\1060\
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    \1058\Treas. Reg. sec. 1.409A-1(b)(6).
    \1059\Treas. Reg. sec. 1.409A-1(b)(5). In addition, statutory 
option arrangements are not nonqualified deferred compensation 
arrangements.
    \1060\Sec. 404(a)(5).
---------------------------------------------------------------------------

                               HOUSE BILL

In general
      The provision allows a qualified employee to elect to 
defer, for income tax purposes, the inclusion in income of the 
amount of income attributable to qualified stock transferred to 
the employee by the employer. An election to defer income 
inclusion (``inclusion deferral election'') with respect to 
qualified stock must be made no later than 30 days after the 
first time the employee's right to the stock is substantially 
vested or is transferable, whichever occurs earlier.
      If an employee elects to defer income inclusion under the 
provision, the income must be included in the employee's income 
for the taxable year that includes the earliest of (1) the 
first date the qualified stock becomes transferable, including, 
solely for this purpose, transferable to the employer;1A\1061\ 
(2) the date the employee first becomes an excluded employee 
(as described below); (3) the first date on which any stock of 
the employer becomes readily tradable on an established 
securities market;\1062\ (4) the date five years after the 
first date the employee's right to the stock becomes 
substantially vested; or (5) the date on which the employee 
revokes her inclusion deferral election.\1063\
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    \1061\Thus, for this purpose, the qualified stock is considered 
transferable if the employee has the ability to sell the stock to the 
employer (or any other person).
    \1062\An established securities market is determined for this 
purpose by the Secretary, but does not include any market unless the 
market is recognized as an established securities market for purposes 
of another Code provision.
    \1063\An inclusion deferral election is revoked at the time and in 
the manner as the Secretary provides.
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      An inclusion deferral election is made in a manner 
similar to the manner in which a section 83(b) election is 
made.\1064\ The provision does not apply to income with respect 
to nonvested stock that is includible as a result of a section 
83(b) election. The provision clarifies that Section 83 (other 
than the provision), including subsection (b), shall not apply 
to RSUs. Therefore, RSUs are not eligible for a section 83(b) 
election. This is the case because, absent this provision, RSUs 
are nonqualified deferred compensation and therefore subject to 
the rules that apply to nonqualified deferred compensation.
---------------------------------------------------------------------------
    \1064\Thus, as in the case of a section 83(b) election under 
present law, the employee must file with the IRS the inclusion deferral 
election and provide the employer with a copy.
---------------------------------------------------------------------------
      An employee may not make an inclusion deferral election 
for a year with respect to qualified stock if, in the preceding 
calendar year, the corporation purchased any of its outstanding 
stock unless at least 25 percent of the total dollar amount of 
the stock so purchased is stock with respect to which an 
inclusion deferral election is in effect (``deferral stock'') 
and the determination of which individuals from whom deferral 
stock is purchased is made on a reasonable basis.\1065\ For 
purposes of this requirement, stock purchased from an 
individual is not treated as deferral stock (and the purchase 
is not treated as a purchase of deferral stock) if, immediately 
after the purchase, the individual holds any deferral stock 
with respect to which an inclusion deferral election has been 
in effect for a longer period than the election with respect to 
the purchased stock. Thus, in general, in applying the purchase 
requirement, an individual's deferral stock with respect to 
which an inclusion deferral election has been in effect for the 
longest periods must be purchased first. A corporation that has 
deferral stock outstanding as of the beginning of any calendar 
year and that purchases any of its outstanding stock during the 
calendar year must report on its income tax return for the 
taxable year in which, or with which, the calendar year ends 
the total dollar amount of the outstanding stock purchased 
during the calendar year and such other information as the 
Secretary may require for purposes of administering this 
requirement.
---------------------------------------------------------------------------
    \1065\This requirement is met if the stock purchased by the 
corporation includes all the corporation's outstanding deferral stock.
---------------------------------------------------------------------------
      A qualified employee may make an inclusion deferral 
election with respect to qualified stock attributable to a 
statutory option.\1066\ In that case, the option is not treated 
as a statutory option and the rules relating to statutory 
options and related stock do not apply. In addition, an 
arrangement under which an employee may receive qualified stock 
is not treated as a nonqualified deferred compensation plan 
solely because of an employee's inclusion deferral election or 
ability to make an election.
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    \1066\For purposes of the requirement that an ESPP provide 
employees with the same rights and privileges, the rules of the 
provision apply in determining which employees have the right to make 
an inclusion deferral election with respect to stock received under the 
ESPP.
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      Deferred income inclusion applies also for purposes of 
the employer's deduction of the amount of income attributable 
to the qualified stock. That is, if an employee makes an 
inclusion deferral election, the employer's deduction is 
deferred until the employer's taxable year in which or with 
which ends the taxable year of the employee for which the 
amount is included in the employee's income as described in 
(1)-(5) above.
Qualified employee and qualified stock
      Under the provision, a qualified employee means an 
individual who is not an excluded employee and who agrees, in 
the inclusion deferral election, to meet the requirements 
necessary (as determined by the Secretary) to ensure the income 
tax withholding requirements of the employer corporation with 
respect to the qualified stock (as described below) are met. 
For this purpose, an excluded employee with respect to a 
corporation is any individual (1) who was a one-percent owner 
of the corporation at any time during the 10 preceding calendar 
years,\1067\ (2) who is, or has been at any prior time, the 
chief executive officer or chief financial officer of the 
corporation or an individual acting in either capacity, (3) who 
is a family member of an individual described in (1) or 
(2),\1068\ or (4) who has been one of the four highest 
compensated officers of the corporation for any of the 10 
preceding taxable years.\1069\
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    \1067\One-percent owner status is determined under the top-heavy 
rules for qualified retirement plans, that is, section 
416(i)(1)(B)(ii).
    \1068\In the case of one-percent owners, this results from 
application of the attribution rules of section 318 under section 
416(i)(1)(B)(i)(II). Family members are determined under section 
318(a)(1) and generally include an individual's spouse, children, 
grandchildren and parents.
    \1069\These officers are determined on the basis of shareholder 
disclosure rules for compensation under the Securities Exchange Act of 
1934, as if such rules applied to the corporation.
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      Qualified stock is any stock of a corporation if--
             an employee receives the stock in 
        connection with the exercise of an option or in 
        settlement of an RSU, and
             the option or RSU was granted by the 
        corporation to the employee in connection with the 
        performance of services and in a year in which the 
        corporation was an eligible corporation (as described 
        below).
      However, qualified stock does not include any stock if, 
at the time the employee's right to the stock becomes 
substantially vested, the employee may sell the stock to, or 
otherwise receive cash in lieu of stock from, the corporation. 
Qualified stock can only be such if it relates to stock 
received in connection with options or RSUs, and does not 
include stock received in connection with other forms of equity 
compensation, including stock appreciation rights or restricted 
stock.
      A corporation is an eligible corporation with respect to 
a calendar year if (1) no stock of the employer corporation (or 
any predecessor) is readily tradable on an established 
securities market during any preceding calendar year,\1070\ and 
(2) the corporation has a written plan under which, in the 
calendar year, not less than 80 percent of all employees who 
provide services to the corporation in the United States (or 
any U.S. possession) are granted stock options, or restricted 
stock units (``RSUs''), with the same rights and privileges to 
receive qualified stock (``80-percent requirement'').\1071\ For 
this purpose, in general, the determination of rights and 
privileges with respect to stock is determined in a similar 
manner as provided under the present-law ESPP rules.\1072\ 
However, employees will not fail to be treated as having the 
same rights and privileges to receive qualified stock solely 
because the number of shares available to all employees is not 
equal in amount, provided that the number of shares available 
to each employee is more than a de minimis amount. In addition, 
rights and privileges with respect to the exercise of a stock 
option are not treated for this purpose as the same as rights 
and privileges with respect to the settlement of an RSU.\1073\
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    \1070\This requirement continues to apply up to the time an 
inclusion deferral election is made. That is, under the provision, no 
inclusion deferral election may be made with respect to qualified stock 
if any stock of the corporation is readily tradable on an established 
securities market at any time before the election is made.
    \1071\In applying the requirement that 80 percent of employees 
receive stock options or RSUs, excluded employees and part-time 
employees are not taken into account. For this purpose, part-time 
employee is defined under section 4980G(d)(4), as an employee who is 
customarily employed for fewer than 30 hours per week.
    \1072\Sec. 423(b)(5).
    \1073\Under a transition rule, in the case of a calendar year 
beginning before January 1, 2018, the 80-percent requirement is applied 
without regard to whether the rights and privileges with respect to the 
qualified stock are the same.
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      For purposes of the provision, corporations that are 
members of the same controlled group\1074\ are treated as one 
corporation.
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    \1074\As defined in sec. 1563(a).
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Notice, withholding and reporting requirements
      Under the provision, a corporation that transfers 
qualified stock to a qualified employee must provide a notice 
to the qualified employee at the time (or a reasonable period 
before) the employee's right to the qualified stock is 
substantially vested (and income attributable to the stock 
would first be includible absent an inclusion deferral 
election). The notice must (1) certify to the employee that the 
stock is qualified stock, and (2) notify the employee (a) that 
the employee may (if eligible) elect to defer income inclusion 
with respect to the stock and (b) that, if the employee makes 
an inclusion deferral election, the amount of income required 
to be included at the end of the deferral period will be based 
on the value of the stock at the time the employee's right to 
the stock first becomes substantially vested, notwithstanding 
whether the value of the stock has declined during the deferral 
period (including whether the value of the stock has declined 
below the employee's tax liability with respect to such stock), 
and the amount of income to be included at the end of the 
deferral period will be subject to withholding as provided 
under the provision, as well as of the employee's 
responsibilities with respect to required withholding. Failure 
to provide the notice may result in the imposition of a penalty 
of $100 for each failure, subject to a maximum penalty of 
$50,000 for all failures during any calendar year.
      An inclusion deferral election applies only for income 
tax purposes. The application of FICA and FUTA are not 
affected. The provision includes specific income tax 
withholding and reporting requirements with respect to income 
subject to an inclusion deferral election.
      For the taxable year for which income subject to an 
inclusion deferral election is required to be included in 
income by the employee (as described above), the amount 
required to be included in income is treated as wages with 
respect to which the employer is required to withhold income 
tax at a rate not less than the highest income tax rate 
applicable to individual taxpayers.\1075\ The employer must 
report on Form W-2 the amount of income covered by an inclusion 
deferral election (1) for the year of deferral and (2) for the 
year the income is required to be included in income by the 
employee. In addition, for any calendar year, the employer must 
report on Form W-2 the aggregate amount of income covered by 
inclusion deferral elections, determined as of the close of the 
calendar year.
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    \1075\That is, the maximum rate of tax in effect for the year under 
section 1. The provision specifies that qualified stock is treated as a 
noncash fringe benefit for income tax withholding purposes.
---------------------------------------------------------------------------
      Effective date.--The provision generally applies with 
respect to stock attributable to options exercised or RSUs 
settled after December 31, 2017. Under a transition rule, until 
the Secretary (or the Secretary's delegate) issues regulations 
or other guidance implementing the 80-percent and employer 
notice requirements under the provision, a corporation will be 
treated as complying with those requirements (respectively) if 
it complies with a reasonable good faith interpretation of the 
requirements. The penalty for a failure to provide the notice 
required under the provision applies to failures after December 
31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except that, for purposes of determining corporations that are 
members of the same controlled group and treated as one 
corporation, the definition of controlled group under section 
414(b) applies.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with modifications. The conference agreement clarifies that (1) 
when an inclusion deferral election is made with respect to 
stock transferred under an ESPP, the option is not considered 
an ESPP, such that when an inclusion deferral election is made 
in connection with the exercise of both ESPPs and ISOs, the 
options are not treated as statutory options but rather as 
nonqualified stock options for FICA purposes (in addition to 
being subject to section 83(i) for income tax purposes), (2) an 
excluded employee includes an individual who first becomes a 1 
percent owner or one of the 4 highest compensated officers in a 
taxable year, notwithstanding that such individual may not have 
been among such categories for the 10 preceding taxable years, 
(3) the requirement that 80 percent of all applicable employees 
be granted stock options or restricted stock units with the 
same rights and privileges cannot be satisfied in a taxable 
year by granting a combination of stock options and RSUs, and 
instead all such employees must either be granted stock options 
or be granted restricted stock units for that year, and (4) the 
exception from treatment as a nonqualified deferred 
compensation plan for purposes of section 409A applies solely 
with respect to an employee who may receive qualified stock. It 
is intended that the requirement that 80 percent of all 
applicable employees be granted stock options or be granted 
restricted stock units apply consistently to eligible 
employees, whether they are new hires or existing employees. 
Additionally, it is intended that the limited circumstances 
outlined in section 83(c)(3) and applicable regulations apply 
with respect to the determination of when stock first becomes 
transferrable or is no longer subject to a substantial risk of 
forfeiture. For example, income inclusion cannot be delayed due 
to a lock-up period as a result of an initial public offering. 
Finally, it is intended that the transition rule provided with 
respect to compliance with the 80-percent and employer notice 
requirements not be expanded beyond these specific items.
4. Increase in excise tax rate for stock compensation of insiders in 
        expatriated corporations (sec. 13604 of the Senate amendment 
        and sec. 4985 of the Code)

                              PRESENT LAW

Income tax treatment of employee stock compensation
In general
      Employers may grant various forms of stock compensation 
to employees,\1076\ including nonstatutory and statutory stock 
options, restricted stock, restricted stock units, and stock 
appreciation rights. The tax treatment of these various forms 
of stock compensation depends on the specific terms and 
conditions of the arrangement and applicable rules.
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    \1076\The terms ``employer'' and ``employee'' are used, although 
the provision herein also applies to individuals who are not employees 
and the service recipients of such non-employee individuals.
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Stock compensation treated as property transferred in connection with 
        the performance of services
      Section 83 generally governs the taxation of transfers of 
any property in connection with the performance of services by 
any service provider. Typically, this encompasses the transfer 
of stock to an employee which is subject to conditions that 
amount to a substantial risk of forfeiture, called ``restricted 
stock.'' Section 83 also generally governs the taxation of 
nonstatutory (or nonqualified) stock options. In general, an 
employee's right to stock or other property is subject to a 
substantial risk of forfeiture if the employee's right to full 
enjoyment of the property is subject to a condition, such as 
the future performance of substantial services.\1077\
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    \1077\See section 83(c)(1) and Treas. Reg. sec. 1.83-3(c) for the 
definition of substantial risk of forfeiture.
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      Generally, an employee must recognize income in the 
taxable year in which the employee's right to the stock is 
transferable or is not subject to a substantial risk of 
forfeiture, whichever occurs earlier (referred to herein as 
``substantially vested''). Thus, if the employee's right to the 
stock is substantially vested when the stock is transferred to 
the employee, the employee recognizes income in the taxable 
year of such transfer, in an amount equal to the fair market 
value of the stock as of the date of transfer (less any amount 
paid for the stock). If at the time the stock is transferred to 
the employee, the employee's right to the stock is not 
substantially vested (referred to herein as ``nonvested''), the 
employee does not recognize income attributable to the stock 
transfer until the taxable year in which the employee's right 
becomes substantially vested. In this case, the amount 
includible in the employee's income is the fair market value of 
the stock as of the date that the employee's right to the stock 
is substantially vested (less any amount paid for the 
stock).\1078\
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    \1078\Under section 83(b), the employee may elect within 30 days of 
transfer to recognize income in the taxable year of transfer, referred 
to as a ``section 83(b)'' election. If a proper and timely election 
under section 83(b) is made, the amount of compensatory income is 
capped at the amount equal to the fair market value of the stock as of 
the date of transfer (less any amount paid for the stock).
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      These rules do not apply to the grant of a nonqualified 
option unless the option has a readily ascertainable fair 
market value.\1079\ Instead, these rules generally apply to the 
transfer of employer stock by the employee on exercise of the 
option. That is, if the right to the stock is substantially 
vested on transfer (the time of exercise), income recognition 
applies for the taxable year of transfer. If the right to the 
stock is nonvested on transfer, the timing of income inclusion 
is determined under the rules applicable to the transfer of 
nonvested stock. In either case, the amount includible in 
income by the employee is the fair market value of the stock as 
of the required time of income inclusion, less the exercise 
price paid by the employee.
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    \1079\See section 83(e)(3) and Treas. Reg. sec. 1.83-7. A 
nonqualified option is an option on employer stock that is not a 
statutory option, discussed below.
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Statutory stock options
      Two types of statutory options apply with respect to 
employer stock: incentive stock options (``ISOs'') and options 
provided under an employee stock purchase plan 
(``ESPP'').\1080\ Stock received pursuant to a statutory option 
is subject to special rules, rather than the rules for 
nonqualified options, discussed above. Unlike nonqualified 
options, statutory options may only be considered as such if 
granted to employees.\1081\ No amount is includible in an 
employee's income on the grant, vesting, or exercise of a 
statutory option.
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    \1080\Sections 421-424 govern statutory options. Section 423(b)(5) 
requires that, under the terms of an ESPP, all employees granted 
options generally must have the same rights and privileges.
    \1081\Secs. 422(a)(2) and 423(a)(2).
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      If a holding requirement is met with respect to the stock 
transferred on exercise of a statutory option and the employee 
later disposes of the stock, the employee's gain generally is 
treated as capital gain rather than ordinary income. Under the 
holding requirement, the employee must not dispose of the stock 
within two years after the date the option is granted and also 
must not dispose of the stock within one year after the date 
the option is exercised. If a disposition occurs before the end 
of the required holding period (a ``disqualifying 
disposition''), the employee recognizes ordinary income in the 
taxable year in which the disqualifying disposition occurs. The 
amount of ordinary income recognized when a disqualifying 
disposition occurs generally equals the fair market value of 
the stock on the date of exercise (that is, when the stock was 
transferred to the employee) less the exercise price paid.
Stock compensation treated as deferred compensation
      A restricted stock unit (``RSU'') is a term used for an 
arrangement under which an employee has the right to receive at 
a specified time in the future an amount determined by 
reference to the value of one or more shares of employer stock. 
An employee's right to receive the future amount may be subject 
to a condition, such as continued employment for a certain 
period or the attainment of certain performance goals. The 
payment to the employee of the amount due under the arrangement 
is referred to as settlement of the RSU. The arrangement may 
provide for the settlement amount to be paid in cash or as a 
transfer of employer stock. An arrangement providing RSUs is 
generally considered a nonqualified deferred compensation plan 
and is subject to the rules, including the limits, of section 
409A,\1082\ unless it meets an exemption from section 409A. If 
the RSU either is exempt from or complies with section 409A, 
the employee is subject to income taxation on receipt of cash 
or the transfer of shares attributable to the RSU.
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    \1082\Section 409A and the regulations thereunder provide rules for 
nonqualified deferred compensation. Unless an arrangement either is 
exempt from or meets the requirements of section 409A, the amount of 
deferred compensation is first includible in income for the taxable 
year when not subject to a substantial risk of forfeiture (as defined), 
even if payment will not occur until a later year. In general, to meet 
the requirements of section 409A, the time when nonqualified deferred 
compensation will be paid, as well as the amount, must be specified at 
the time of deferral with limits on further deferral after the time for 
payment. Various other requirements apply, including that payment can 
only occur on specific defined events. Compensation that fails to meet 
the requirements of section 409A is also subject to an additional 
income tax of 20 percent on amounts includible in income and a 
potential interest factor tax (``409A taxes''). Section 409A and the 
additional 409A taxes apply to increases in the value of the failed 
compensation each year until it is paid.
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      A stock appreciation right (``SAR'') is an arrangement 
under which an employee has the right to receive an amount (in 
the form of cash or stock) determined by reference to the 
appreciation in value of one or more shares of employer stock, 
based on the difference in the stock's value when the employee 
chooses to exercise the right and the value of the stock on the 
date of grant of the SAR. An SAR is generally taxable at the 
time of exercise on the amount of cash or value of stock 
transferred at the time of exercise of the SAR.\1083\
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    \1083\Rev. Rul. 80-300, 1980-2 C.B. 165.
---------------------------------------------------------------------------
      Various exemptions from section 409A apply, including 
transfers of property subject to section 83, such as restricted 
stock.\1084\ Nonqualified options and SARs are not 
automatically exempt from section 409A, but may be structured 
so as not to be considered nonqualified deferred 
compensation.\1085\ In addition, ISOs and ESPPs are exempt from 
section 409A.\1086\
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    \1084\Treas. Reg. sec. 1.409A-1(b)(6).
    \1085\Treas. Reg. sec. 1.409A-1(b)(5).
    \1086\Treas. Reg. sec. 1.409A-1(b)(5)(ii).
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Section 4985 excise tax on stock compensation of insiders of 
        expatriated corporations
      Under section 4985, certain holders of stock options and 
other stock-based compensation are subject to an excise tax 
upon certain transactions that result in an expatriated 
corporation\1087\ (also referred to as corporate 
inversions).\1088\ The provision imposes an excise tax, 
currently at the rate of 15 percent, on the value of specified 
stock compensation held (directly or indirectly) by or for the 
benefit of a disqualified individual, or a member of such 
individual's family, at any time during the 12-month period 
beginning six months before the corporation's expatriation 
date. Specified stock compensation is treated as held for the 
benefit of a disqualified individual if such compensation is 
held by an entity, e.g., a partnership or trust, in which the 
individual, or a member of the individual's family, has an 
ownership interest.
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    \1087\Sec. 7874(a)(2).
    \1088\For further discussion of the tax treatment of expatriated 
entities before the effective date of section 7874 and concerns that 
led to the enactment of sections 7874 and 4985, see Joint Committee on 
Taxation, General Explanation of Tax Legislation Enacted in the 108th 
Congress (JCS-5-05), May 2005.
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      A disqualified individual is any individual who, with 
respect to a corporation, is, at any time during the 12-month 
period beginning on the date which is six months before the 
expatriation date, subject to the requirements of section 16(a) 
of the Securities and Exchange Act of 1934 with respect to the 
corporation, or any member of the corporation's expanded 
affiliated group,\1089\ or would be subject to such 
requirements if the corporation (or member) were an issuer of 
equity securities referred to in section 16(a). Disqualified 
individuals generally include officers (as defined by section 
16(a)),\1090\ directors, and 10-percent owners of private and 
publicly-held corporations.
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    \1089\An expanded affiliated group is an affiliated group (under 
section 1504) except that such group is determined without regard to 
the exceptions for certain corporations and is determined by 
substituting ``more than 50 percent'' for ``at least 80 percent.''
    \1090\An officer is defined as the president, principal financial 
officer, principal accounting officer (or, if there is no such 
accounting officer, the controller), any vice-president in charge of a 
principal business unit, division or function (such as sales, 
administration or finance), any other officer who performs a policy-
making function, or any other person who performs similar policy-making 
functions.
---------------------------------------------------------------------------
      The excise tax is imposed on a disqualified individual of 
an expatriated corporation (as defined for this purpose) only 
if gain is recognized in whole or part by any shareholder by 
reason of the acquisition resulting in the corporate 
inversion.\1091\
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    \1091\As referred to in section 7874(a)(2)(B)(i).
---------------------------------------------------------------------------
      Specified stock compensation subject to the excise tax 
includes any payment (or right to payment)\1092\ granted by the 
expatriated corporation (or any member of the corporation's 
expanded affiliated group) to any person in connection with the 
performance of services by a disqualified individual for such 
corporation (or member of the corporation's expanded affiliated 
group) if the value of the payment or right is based on, or 
determined by reference to, the value or change in value of 
stock of such corporation (or any member of the corporation's 
expanded affiliated group). In determining whether such 
compensation exists and valuing such compensation, all 
restrictions, other than non-lapse restrictions, are ignored. 
Thus, the excise tax applies, and the value subject to the tax 
is determined, without regard to whether such specified stock 
compensation is subject to a substantial risk of forfeiture or 
is exercisable at the time of the corporate inversion. 
Specified stock compensation includes compensatory stock and 
restricted stock grants, compensatory stock options, and other 
forms of stock-based compensation, including stock appreciation 
rights, restricted stock units, phantom stock, and phantom 
stock options. Specified stock compensation also includes 
nonqualified deferred compensation that is treated as though it 
were invested in stock or stock options of the expatriating 
corporation (or member). For example, the provision applies to 
a disqualified individual's nonqualified deferred compensation 
if company stock is one of the actual or deemed investment 
options under the nonqualified deferred compensation plan.
---------------------------------------------------------------------------
    \1092\Under the provision, any transfer of property is treated as a 
payment and any right to a transfer of property is treated as a right 
to a payment.
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      Specified stock compensation includes a compensation 
arrangement that gives the disqualified individual an economic 
stake substantially similar to that of a corporate shareholder. 
A payment directly tied to the value of the stock is specified 
stock compensation.
      The excise tax applies to any such specified stock 
compensation previously granted to a disqualified individual 
but cancelled or cashed-out within the six-month period ending 
with the expatriation date, and to any specified stock 
compensation awarded in the six-month period beginning with the 
expatriation date. As a result, for example, if a corporation 
cancels outstanding options three months before the transaction 
and then reissues comparable options three months after the 
transaction, the tax applies both to the cancelled options and 
the newly granted options.
      Specified stock compensation subject to the tax does not 
include a statutory stock option or any payment or right from a 
qualified retirement plan or annuity, a tax-sheltered annuity, 
a simplified employee pension, or a simple retirement account. 
In addition, under the provision, the excise tax does not apply 
to any stock option that is exercised during the six-month 
period before the expatriation date or to any stock acquired 
pursuant to such exercise, if income is recognized under 
section 83 on or before the expatriation date with respect to 
the stock acquired pursuant to such exercise. The excise tax 
also does not apply to any specified stock compensation that is 
exercised, sold, exchanged, distributed, cashed out, or 
otherwise paid during such period in a transaction in which 
income, gain, or loss is recognized in full.
      For specified stock compensation held on the expatriation 
date, the amount of the tax is determined based on the value of 
the compensation on such date. The tax imposed on specified 
stock compensation cancelled during the six-month period before 
the expatriation date is determined based on the value of the 
compensation on the day before such cancellation, while 
specified stock compensation granted after the expatriation 
date is valued on the date granted. Under the provision, the 
cancellation of a non-lapse restriction is treated as a grant.
      The value of the specified stock compensation on which 
the excise tax is imposed is the fair value in the case of 
stock options (including warrants and other similar rights to 
acquire stock) and stock appreciation rights and the fair 
market value for all other forms of compensation. For purposes 
of the tax, the fair value of an option (or a warrant or other 
similar right to acquire stock) or a stock appreciation right 
is determined using an appropriate option-pricing model, as 
specified or permitted by the Treasury Secretary, that takes 
into account the stock price at the valuation date; the 
exercise price under the option; the remaining term of the 
option; the volatility of the underlying stock and the expected 
dividends on it; and the risk-free interest rate over the 
remaining term of the option. Options that have no intrinsic 
value (or ``spread'') because the exercise price under the 
option equals or exceeds the fair market value of the stock at 
valuation nevertheless have a fair value and are subject to tax 
under the provision. The value of other forms of compensation, 
such as phantom stock or restricted stock, is the fair market 
value of the stock as of the date of the expatriation 
transaction. The value of any deferred compensation that can be 
valued by reference to stock is the amount that the 
disqualified individual would receive if the plan were to 
distribute all such deferred compensation in a single sum on 
the date of the expatriation transaction (or the date of 
cancellation or grant, if applicable).
      The excise tax also applies to any payment by the 
expatriated corporation or any member of the expanded 
affiliated group made to an individual, directly or indirectly, 
in respect of the tax. Whether a payment is made in respect of 
the tax is determined under all of the facts and circumstances. 
Any payment made to keep the individual in the same after-tax 
position that the individual would have been in had the tax not 
applied is a payment made in respect of the tax. This includes 
direct payments of the tax and payments to reimburse the 
individual for payment of the tax. Any payment made in respect 
of the tax is includible in the income of the individual, but 
is not deductible by the corporation.
      To the extent that a disqualified individual is also a 
covered employee under section 162(m), the limit on the 
deduction allowed for employee remuneration for such employee 
is reduced by the amount of any payment (including 
reimbursements) made in respect of the tax under the provision. 
As discussed above, this includes direct payments of the tax 
and payments to reimburse the individual for payment of the 
tax.
      The payment of the excise tax has no effect on the 
subsequent tax treatment of any specified stock compensation. 
Thus, the payment of the tax has no effect on the individual's 
basis in any specified stock compensation and no effect on the 
tax treatment for the individual at the time of exercise of an 
option or payment of any specified stock compensation, or at 
the time of any lapse or forfeiture of such specified stock 
compensation. The payment of the tax is not deductible and has 
no effect on any deduction that might be allowed at the time of 
any future exercise or payment.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision increases the 15 percent rate of excise 
tax, imposed on the value of stock compensation held by 
insiders of an expatriated corporation, to 20 percent.
      Effective date.--The provision applies to corporations 
first becoming expatriated corporations after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

                          J. Other Provisions

1. Treatment of gain or loss of foreign persons from sale or exchange 
        of interests in partnerships engaged in trade or business 
        within the United States (sec. 13501 of the Senate amendment 
        and secs. 864(c) and 1446 of the Code)

                              PRESENT LAW

In general
      A partnership generally is not treated as a taxable 
entity, but rather, income of the partnership is taken into 
account on the tax returns of the partners. The character (as 
capital or ordinary) of partnership items passes through to the 
partners as if the items were realized directly by the 
partners.\1093\ A partner holding a partnership interest 
includes in income its distributive share (whether or not 
actually distributed) of partnership items of income and gain, 
including capital gain eligible for the lower tax rates, and 
deducts its distributive share of partnership items of 
deduction and loss. A partner's basis in the partnership 
interest is increased by any amount of gain and decreased by 
any amount of losses thus included. These basis adjustments 
prevent double taxation of partnership income to the partner. 
Money distributed to the partner by the partnership is taxed to 
the extent the amount exceeds the partner's basis in the 
partnership interest.
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    \1093\Sec. 702.
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      Gain or loss from the sale or exchange of a partnership 
interest generally is treated as gain or loss from the sale or 
exchange of a capital asset.\1094\ However, the amount of money 
and the fair market value of property received in the exchange 
that represent the partner's share of certain ordinary income-
producing assets of the partnership give rise to ordinary 
income rather than capital gain.\1095\ In general, a 
partnership does not adjust the basis of partnership property 
following the transfer of a partnership interest unless either 
the partnership has made a one-time election to do so,\1096\ or 
the partnership has a substantial built-in loss immediately 
after the transfer.\1097\ If an election is in effect or the 
partnership has a substantial built-in loss immediately after 
the transfer, adjustments are made with respect to the 
transferee partner. These adjustments are to account for the 
difference between the transferee partner's proportionate share 
of the adjusted basis of the partnership property and the 
transferee partner's basis in its partnership interest.\1098\ 
The effect of the adjustments on the basis of partnership 
property is to approximate the result of a direct purchase of 
the property by the transferee partner.
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    \1094\Sec. 741; Pollack v. Commissioner, 69 T.C. 142 (1977).
    \1095\Sec. 751(a). These ordinary income-producing assets are 
unrealized receivables of the partnership or inventory items of the 
partnership (``751 assets'').
    \1096\Sec. 754.
    \1097\Sec. 743(a).
    \1098\Sec. 743(b).
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Source of gain or loss on transfer of a partnership interest
      A foreign person that is engaged in a trade or business 
in the United States is taxed on income that is ``effectively 
connected'' with the conduct of that trade or business 
(``effectively connected gain or loss'').\1099\ Partners in a 
partnership are treated as engaged in the conduct of a trade or 
business within the United States if the partnership is so 
engaged.\1100\ Any gross income derived by the foreign person 
that is not effectively connected with the person's U.S. 
business is not taken into account in determining the rates of 
U.S. tax applicable to the person's income from the 
business.\1101\
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    \1099\Secs. 871(b), 864(c), 882.
    \1100\Sec. 875.
    \1101\Secs. 871(b)(2), and 882(a)(2). Non-business income received 
by foreign persons from U.S. sources is generally subject to tax on a 
gross basis at a rate of 30 percent, and is collected by withholding at 
the source of the payment. The income of non-resident aliens or foreign 
corporations that is subject to tax at a rate of 30-percent is fixed, 
determinable, annual or periodical income that is not effectively 
connected with the conduct of a U.S. trade or business.
---------------------------------------------------------------------------
      Among the factors taken into account in determining 
whether income, gain, or loss is effectively connected gain or 
loss are the extent to which the income, gain, or loss is 
derived from assets used in or held for use in the conduct of 
the U.S. trade or business and whether the activities of the 
trade or business were a material factor in the realization of 
the income, gain, or loss (the ``asset use'' and ``business 
activities'' tests).\1102\ In determining whether the asset use 
or business activities tests are met, due regard is given to 
whether such assets or such income, gain, or loss were 
accounted for through such trade or business. Thus, 
notwithstanding the general rule that source of gain or loss 
from the sale or exchange of personal property is generally 
determined by the residence of the seller,\1103\ a foreign 
partner may have effectively connected income by reason of the 
asset use or business activities of the partnership in which he 
is an investor.
---------------------------------------------------------------------------
    \1102\Sec. 864(c)(2).
    \1103\Sec. 865(a).
---------------------------------------------------------------------------
      Special rules apply to treat gain or loss from 
disposition of U.S. real property interests as effectively 
connected with the conduct of a U.S. trade or business.\1104\ 
To the extent that consideration received by the nonresident 
alien or foreign corporation for all or part of its interest in 
a partnership is attributable to a U.S. real property interest, 
that consideration is considered to be received from the sale 
or exchange in the United States of such property.\1105\ In 
certain circumstances, gain attributable to sales of U.S. real 
property interests may be subject to withholding tax of ten 
percent of the amount realized on the transfer.\1106\
---------------------------------------------------------------------------
    \1104\Sec. 897(a), (g).
    \1105\Sec. 897(g).
    \1106\Sec. 1445(e)(5). Temp. Treas. Reg. sec. 1.1445-11T(b),(d).
---------------------------------------------------------------------------
      Under a 1991 revenue ruling, in determining the source of 
gain or loss from the sale or exchange of an interest in a 
foreign partnership, the IRS applied the asset-use test and 
business activities test at the partnership level to determine 
the extent to which income derived from the sale or exchange is 
effectively connected with that U.S. business.\1107\ Under the 
ruling, if there is unrealized gain or loss in partnership 
assets that would be treated as effectively connected with the 
conduct of a U.S. trade or business if those assets were sold 
by the partnership, some or all of the foreign person's gain or 
loss from the sale or exchange of a partnership interest may be 
treated as effectively connected with the conduct of a U.S. 
trade or business. However, a 2017 Tax Court case rejects the 
logic of the ruling and instead holds that, generally, gain or 
loss on sale or exchange by a foreign person of an interest in 
a partnership that is engaged in a U.S. trade or business is 
foreign-source.\1108\
---------------------------------------------------------------------------
    \1107\Rev. Rul. 91-32, 1991-1 C.B. 107.
    \1108\See Grecian Magnesite Mining v. Commissioner, 149 T.C. No. 3 
(July 13, 2017).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the provision, gain or loss from the sale or 
exchange of a partnership interest is effectively connected 
with a U.S. trade or business to the extent that the transferor 
would have had effectively connected gain or loss had the 
partnership sold all of its assets at fair market value as of 
the date of the sale or exchange. The provision requires that 
any gain or loss from the hypothetical asset sale by the 
partnership be allocated to interests in the partnership in the 
same manner as nonseparately stated income and loss.
      The provision also requires the transferee of a 
partnership interest to withhold 10 percent of the amount 
realized on the sale or exchange of a partnership interest 
unless the transferor certifies that the transferor is not a 
nonresident alien individual or foreign corporation. If the 
transferee fails to withhold the correct amount, the 
partnership is required to deduct and withhold from 
distributions to the transferee partner an amount equal to the 
amount the transferee failed to withhold.
      The provision provides the Secretary of the Treasury with 
specific regulatory authority to address coordination with the 
nonrecognition provisions of the Code.
      Effective date.--The provision is effective for sales and 
exchanges on or after November 27, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement generally follows the Senate 
amendment. The conference agreement modifies the grant of 
authority to the Secretary of the Treasury to make clear that 
the Secretary shall issues such regulations as the Secretary 
determines appropriate for the application of the paragraph, 
including in exchanges described in sections 332, 351, 354, 
355, 356, or 361. The conference agreement also provides that 
the provisions related to withholding are effective for sales 
and exchanges after December 31, 2017. Additionally, the 
conferees intend that, under regulatory authority provided by 
the Senate amendment to carry out withholding requirements of 
the provision, the Secretary may provide guidance permitting a 
broker, as agent of the transferee, to deduct and withhold the 
tax equal to 10 percent of the amount realized on the 
disposition of a partnership interest to which the provision 
applies. For example, such guidance may provide that if an 
interest in a publicly traded partnership is sold by a foreign 
partner through a broker, the broker may deduct and withhold 
the 10-percent tax on behalf of the transferee.
      Effective date.--The portion of the provision treating 
gain or loss on sale of a partnership interest as effectively 
connected income is effective for sales, exchanges, and 
dispositions on or after November 27, 2017. The portion of the 
provision requiring withholding on sales or exchanges of 
partnership interests is effective for sales, exchanges, and 
dispositions after December 31, 2017.
2. Modification of the definition of substantial built-in loss in the 
        case of transfer of partnership interest (sec. 13502 of the 
        Senate amendment and sec. 743 of the Code)

                              PRESENT LAW

      In general, a partnership does not adjust the basis of 
partnership property following the transfer of a partnership 
interest unless either the partnership has made a one-time 
election under section 754 to make basis adjustments, or the 
partnership has a substantial built-in loss immediately after 
the transfer.\1109\
---------------------------------------------------------------------------
    \1109\Sec. 743(a).
---------------------------------------------------------------------------
      If an election is in effect, or if the partnership has a 
substantial built-in loss immediately after the transfer, 
adjustments are made with respect to the transferee partner. 
These adjustments are to account for the difference between the 
transferee partner's proportionate share of the adjusted basis 
of the partnership property and the transferee's basis in its 
partnership interest.\1110\ The adjustments are intended to 
adjust the basis of partnership property to approximate the 
result of a direct purchase of the property by the transferee 
partner.
---------------------------------------------------------------------------
    \1110\Sec. 743(b).
---------------------------------------------------------------------------
      Under the provision, a substantial built-in loss exists 
if the partnership's adjusted basis in its property exceeds by 
more than $250,000 the fair market value of the partnership 
property.\1111\ Certain securitization partnerships and 
electing investment partnerships are not treated as having a 
substantial built-in loss in certain instances, and thus are 
not required to make basis adjustments to partnership 
property.\1112\ For electing investment partnerships, in lieu 
of the partnership basis adjustments, a partner-level loss 
limitation rule applies.\1113\
---------------------------------------------------------------------------
    \1111\Sec. 743(d).
    \1112\See sec. 743(e) (alternative rules for electing investment 
partnerships) and sec. 743(f) (exception for securitization 
partnerships).
    \1113\Unlike in the case of an electing investment partnership, the 
partner-level loss limitation rule does not apply for a securitization 
partnership.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision modifies the definition of a substantial 
built-in loss for purposes of section 743(d), affecting 
transfers of partnership interests. Under the provision, in 
addition to the present-law definition, a substantial built-in 
loss also exists if the transferee would be allocated a net 
loss in excess of $250,000 upon a hypothetical disposition by 
the partnership of all partnership's assets in a fully taxable 
transaction for cash equal to the assets' fair market value, 
immediately after the transfer of the partnership interest.
      For example, a partnership of three taxable partners 
(partners A, B, and C) has not made an election pursuant to 
section 754. The partnership has two assets, one of which, 
Asset X, has a built-in gain of $1 million, while the other 
asset, Asset Y, has a built-in loss of $900,000. Pursuant to 
the partnership agreement, any gain on sale or exchange of 
Asset X is specially allocated to partner A. The three partners 
share equally in all other partnership items, including in the 
built-in loss in Asset Y. In this case, each of partner B and 
partner C has a net built-in loss of $300,000 (one third of the 
loss attributable to asset Y) allocable to his partnership 
interest. Nevertheless, the partnership does not have an 
overall built-in loss, but a net built-in gain of $100,000 ($1 
million minus $900,000). Partner C sells his partnership 
interest to another person, D, for $33,333. Under the 
provision, the test for a substantial built-in loss applies 
both at the partnership level and at the transferee partner 
level. If the partnership were to sell all its assets for cash 
at their fair market value immediately after the transfer to D, 
D would be allocated a loss of $300,000 (one third of the 
built-in loss of $900,000 in Asset Y). A substantial built-in 
loss exists under the partner-level test added by the 
provision, and the partnership adjusts the basis of its assets 
accordingly with respect to D.
      Effective date.--The provision applies to transfers of 
partnership interests after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
      Effective date.--The provision applies to transfers of 
partnership interests after December 31, 2017.
3. Charitable contributions and foreign taxes taken into account in 
        determining limitation on allowance of partner's share of loss 
        (sec. 13503 of the Senate amendment and sec. 704 of the Code)

                              PRESENT LAW

      A partner's distributive share of partnership loss 
(including capital loss) is allowed only to the extent of the 
adjusted basis (before reduction by current year's losses) of 
the partner's interest in the partnership at the end of the 
partnership taxable year in which the loss occurred. Any 
disallowed loss is allowable as a deduction at the end of the 
first succeeding partnership taxable year, and subsequent 
taxable years, to the extent that the partner's adjusted basis 
for its partnership interest at the end of any such year 
exceeds zero (before reduction by the loss for the year).\1114\
---------------------------------------------------------------------------
    \1114\Sec. 704(d) and Treas. Reg. sec. 1.704-1(d)(1).
---------------------------------------------------------------------------
      A partner's basis in its partnership interest is 
increased by its distributive share of income (including tax 
exempt income). A partner's basis in its partnership interest 
is decreased (but not below zero) by distributions by the 
partnership and its distributive share of partnership losses 
and expenditures of the partnership not deductible in computing 
partnership taxable income and not properly chargeable to 
capital account.\1115\ In the case of a charitable 
contribution, a partner's basis is reduced by the partner's 
distributive share of the adjusted basis of the contributed 
property.\1116\
---------------------------------------------------------------------------
    \1115\Sec. 705(a).
    \1116\Rev. Rul. 96-11, 1996-1 C. B. 140.
---------------------------------------------------------------------------
      A partnership computes its taxable income in the same 
manner as an individual with certain exceptions. The exceptions 
provide, in part, that the deductions for foreign taxes and 
charitable contributions are not allowed to the 
partnership.\1117\ Instead, a partner takes into account its 
distributive share of the foreign taxes paid by the partnership 
and the charitable contributions made by the partnership for 
the taxable year.\1118\
---------------------------------------------------------------------------
    \1117\Sec. 703(a)(2)(B) and (C). In addition, section 703(a)(2) 
provides that other deductions are not allowed to the partnership, 
notwithstanding that the partnership's taxable income is computed in 
the same manner as an individual's taxable income, specifically: 
personal exemptions, net operating loss deductions, certain itemized 
deductions for individuals, or depletion.
    \1118\Sec. 702.
---------------------------------------------------------------------------
      However, in applying the basis limitation on partner 
losses, Treasury regulations do not take into account the 
partner's share of partnership charitable contributions and 
foreign taxes paid or accrued.\1119\ The IRS has taken the 
position in a private letter ruling that the basis limitation 
on partner losses does not apply to limit the partner's 
deduction for its share of the partnership's charitable 
contributions.\1120\ While the regulations relating to the loss 
limitation do not mention the foreign tax credit, a taxpayer 
may choose the foreign tax credit in lieu of deducting foreign 
taxes.\1121\
---------------------------------------------------------------------------
    \1119\The regulation provides that ``[i]f the partner's 
distributive share of the aggregate of items of loss specified in 
section 702(a)(1), (2), (3), (8) [now (7)], and (9) [now (8)] exceeds 
the basis of the partner's interest computed under the preceding 
sentence, the limitation on losses under section 704(d) must be 
allocated to his distributive share of each such loss.'' The regulation 
does not refer to section 702(a)(4) (charitable contributions) and 
702(a)(6) (foreign taxes paid or accrued). Treas. Reg. sec. 1.704-
1(d)(2).
    \1120\Priv. Ltr. Rul. 8405084. And see William S. McKee, William F. 
Nelson and Robert L. Whitmire, Federal Taxation of Partnerships and 
Partners, WG&L, 4th Edition (2011), paragraph 11.05[1][b], pp. 11-214 
(noting that the ``failure to include charitable contributions in the 
Sec. 704(d) limitation is an apparent technical flaw in the statute. 
Because of it, a zero-basis partner may reap the benefits of a 
partnership charitable contribution without an offsetting decrease in 
the basis of his interest, whereas a fellow partner who happens to have 
a positive basis may do so only at the cost of a basis decrease.'').
    \1121\Sec. 901.
---------------------------------------------------------------------------
      By contrast, under S corporation rules limiting the 
losses and deductions which may be taken into account by a 
shareholder of an S corporation to the shareholder's basis in 
stock and debt of the corporation, the shareholder's pro rata 
share of charitable contributions and foreign taxes are taken 
into account.\1122\ In the case of charitable contributions, a 
special rule is provided prorating the amount of appreciation 
not subject to the limitation in the case of charitable 
contributions of appreciated property by the S 
corporation.\1123\
---------------------------------------------------------------------------
    \1122\Sec. 1366(d) and sec. 1366(a)(1). Under a related rule, the 
shareholder's basis in his interest is decreased by the basis (rather 
than the fair market value) of appreciated property by reason of a 
charitable contribution of the property by the S corporation (sec. 
1367(a)(2)).
    \1123\Sec. 1366(d)(4).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision modifies the basis limitation on partner 
losses to provide that the limitation takes into account a 
partner's distributive share of partnership charitable 
contributions (as defined in section 170(c)) and taxes 
(described in section 901) paid or accrued to foreign countries 
and to possessions of the United States. Thus, the amount of 
the basis limitation on partner losses is decreased to reflect 
these items. In the case of a charitable contribution by the 
partnership, the amount of the basis limitation on partner 
losses is decreased by the partner's distributive share of the 
adjusted basis of the contributed property. In the case of a 
charitable contribution by the partnership of property whose 
fair market value exceeds its adjusted basis, a special rule 
provides that the basis limitation on partner losses does not 
apply to the extent of the partner's distributive share of the 
excess.
      Effective date.--The provision applies to partnership 
taxable years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
      Effective date.--The provision applies to partnership 
taxable years beginning after December 31, 2017.
4. Cost basis of specified securities determined without regard to 
        identification (sec. 13533 of the Senate amendment and sec. 
        1012 of the Code)

                              PRESENT LAW

In general
      Gain or loss generally is recognized for Federal income 
tax purposes on realization of that gain or loss (for example, 
as the result of sale of property). The taxpayer's gain or loss 
on a disposition of property is the difference between the 
amount realized on the sale and the taxpayer's adjusted basis 
in the property disposed of.\1124\
---------------------------------------------------------------------------
    \1124\Sec. 1001.
---------------------------------------------------------------------------
      To compute adjusted basis, a taxpayer must first 
determine the property's unadjusted or original basis and then 
make adjustments prescribed by the Code.\1125\ The original 
basis of property is its cost, except as otherwise prescribed 
by the Code (for example, in the case of property acquired by 
gift or bequest or in a tax-free exchange). Once determined, 
the taxpayer's original basis generally is adjusted downward to 
take account of depreciation or amortization, and generally is 
adjusted upward to reflect income and gain inclusions or 
capital improvements with respect to the property.
---------------------------------------------------------------------------
    \1125\Sec. 1016.
---------------------------------------------------------------------------
Basis computation rules
      If a taxpayer has acquired stock in a corporation on 
different dates or at different prices and sells or transfers 
some of the shares of that stock, and the lot from which the 
stock is sold or transferred is not adequately identified, the 
shares sold are deemed to be drawn from the earliest acquired 
shares (the ``first-in-first-out rule'').\1126\ However, if a 
taxpayer makes an adequate identification (``specific 
identification'') of shares of stock that it sells, the shares 
of stock treated as sold are the shares that have been 
identified.\1127\ A taxpayer who owns shares in a regulated 
investment company (``RIC'') generally is permitted to elect, 
in lieu of the specific identification or first-in-first-out 
methods, to determine the basis of RIC shares sold under one of 
two average-cost-basis methods described in Treasury 
regulations (together, the ``average basis method'').\1128\
---------------------------------------------------------------------------
    \1126\Treas. Reg. sec. 1.1012-1(c)(1).
    \1127\Treas. Reg. sec. 1.1012-1(c)(2).
    \1128\Treas. Reg. sec. 1.1012-1(e).
---------------------------------------------------------------------------
      In the case of the sale, exchange, or other disposition 
of a specified security (defined below) to which the basis 
reporting requirement described below applies, the first-in-
first-out rule, specific identification, and average basis 
method conventions are applied on an account by account 
basis.\1129\ To facilitate the determination of the cost of RIC 
stock under the average basis method, RIC stock acquired before 
January 1, 2012, generally is treated as a separate account 
from RIC stock acquired on or after that date unless the RIC 
(or a broker holding the stock as a nominee) elects otherwise 
with respect to one or more of its stockholders, in which case 
all the RIC stock with respect to which the election is made is 
treated as a single account and the basis reporting requirement 
described below applies to all that stock.\1130\
---------------------------------------------------------------------------
    \1129\Sec. 1012(c)(1).
    \1130\Sec. 1012(c)(2).
---------------------------------------------------------------------------
      The basis of stock acquired after December 31, 2010, in 
connection with a dividend reinvestment plan (``DRP'') is 
determined under the average basis method for as long as the 
stock is held as part of that plan.\1131\
---------------------------------------------------------------------------
    \1131\Sec. 1012(d)(1). Other special rules apply to DRP stock. See 
sec. 1012(d)(2) and (3).
---------------------------------------------------------------------------
Basis reporting
      A broker is required to report to the IRS a customer's 
adjusted basis in a covered security that the customer has sold 
and whether any gain or loss from the sale is long-term or 
short-term.\1132\
---------------------------------------------------------------------------
    \1132\Sec. 6045(g); Treas. Reg. sec. 1.6045-1(d).
---------------------------------------------------------------------------
      A covered security is, in general, any specified security 
acquired after an applicable date specified in the basis 
reporting rules. A specified security is any share of stock of 
a corporation (including stock of a RIC); any note, bond, 
debenture, or other evidence of indebtedness; any commodity, or 
contract or derivative with respect to such commodity, if the 
Treasury Secretary determines that adjusted basis reporting is 
appropriate; and any other financial instrument with respect to 
which the Treasury Secretary determines that adjusted basis 
reporting is appropriate.
      For purposes of satisfying the basis reporting 
requirements, a broker must determine a customer's adjusted 
basis in accordance with rules intended to ensure that the 
broker's reported adjusted basis numbers are the same numbers 
that customers must use in filing their tax returns.\1133\
---------------------------------------------------------------------------
    \1133\See sec. 6045(g)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision requires that the cost of any specified 
security sold, exchanged, or otherwise disposed of on or after 
January 1, 2018, be determined on a first-in first-out basis 
except to the extent the average basis method is otherwise 
allowed (as in the case of a taxpayer holding shares in a RIC). 
The provision does not apply to sales, exchanges, or other 
dispositions of specified securities by RICs.
      The provision includes several conforming amendments, 
including a rule restricting a broker's basis reporting method 
to the first-in first-out method in the case of the sale of any 
stock for which the average basis method is not permitted.
      Effective date.--The provision applies to sales, 
exchanges, and other dispositions after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
5. Expansion of qualifying beneficiaries of an electing small business 
        trust (sec. 13541 of the Senate amendment and sec. 1361 of the 
        Code)

                              PRESENT LAW

      An electing small business trust (``ESBT'') may be a 
shareholder of an S corporation.\1134\ Generally, the eligible 
beneficiaries of an ESBT include individuals, estates, and 
certain charitable organizations eligible to hold S corporation 
stock directly. A nonresident alien individual may not be a 
shareholder of an S corporation and may not be a potential 
current beneficiary of an ESBT.\1135\
---------------------------------------------------------------------------
    \1134\Sec. 1361(c)(2)(A)(v).
    \1135\Sec. 1361(b)(1)(C) and (c)(2)(B)(v).
---------------------------------------------------------------------------
      The portion of an ESBT which consists of the stock of an 
S corporation is treated as a separate trust and generally is 
taxed on its share of the S corporation's income at the highest 
rate of tax imposed on individual taxpayers. This income 
(whether or not distributed by the ESBT) is not taxed to the 
beneficiaries of the ESBT.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment allows a nonresident alien 
individual to be a potential current beneficiary of an ESBT.
      Effective date.--The provision takes effect on January 1, 
2018.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
6. Charitable contribution deduction for electing small business trusts 
        (sec. 13542 of the Senate amendment and sec. 642(c) of the 
        Code)

                              PRESENT LAW

      An electing small business trust (``ESBT'') may be a 
shareholder of an S corporation.\1136\ The portion of an ESBT 
that consists of the stock of an S corporation is treated as a 
separate trust and generally is taxed on its share of the S 
corporation's income at the highest rate of tax imposed on 
individual taxpayers. This income (whether or not distributed 
by the ESBT) is not taxed to the beneficiaries of the ESBT. In 
addition to nonseparately computed income or loss, an S 
corporation reports to its shareholders their pro rata share of 
certain separately stated items of income, loss, deduction, and 
credit.\1137\ For this purpose, charitable contributions (as 
defined in section 170(c)) of an S corporation are separately 
stated and taken by the shareholder.
---------------------------------------------------------------------------
    \1136\Sec. 1361(c)(2)(A)(v).
    \1137\Sec. 1366(a)(1).
---------------------------------------------------------------------------
      The treatment of a charitable contribution passed through 
by an S corporation depends on the shareholder. Because an ESBT 
is a trust, the deduction for charitable contributions 
applicable to trusts,\1138\ rather than the deduction 
applicable to individuals,\1139\ applies to the trust. 
Generally, a trust is allowed a charitable contribution 
deduction for amounts of gross income, without limitation, 
which pursuant to the terms of the governing instrument are 
paid for a charitable purpose. No carryover of excess 
contributions is allowed. An individual is allowed a charitable 
contribution deduction limited to certain percentages of 
adjusted gross income generally with a five-year carryforward 
of amounts in excess of this limitation.
---------------------------------------------------------------------------
    \1138\Sec. 642(c).
    \1139\Sec. 170.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that the charitable 
contribution deduction of an ESBT is not determined by the 
rules generally applicable to trusts but rather by the rules 
applicable to individuals. Thus, the percentage limitations and 
carryforward provisions applicable to individuals apply to 
charitable contributions made by the portion of an ESBT holding 
S corporation stock.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
7. Production period for beer, wine, and distilled spirits (sec. 13801 
        of the Senate amendment and sec. 263A of the Code)

                              PRESENT LAW

In general
      The uniform capitalization (``UNICAP'') rules, which were 
enacted as part of the Tax Reform Act of 1986,\1140\ require 
certain direct and indirect costs allocable to real or tangible 
personal property produced by the taxpayer to be included in 
either inventory or capitalized into the basis of such 
property, as applicable.\1141\ For real or personal property 
acquired by the taxpayer for resale, section 263A generally 
requires certain direct and indirect costs allocable to such 
property to be included in inventory.
---------------------------------------------------------------------------
    \1140\Sec. 803(a) of Pub. L. No. 99-514 (1986).
    \1141\Sec. 263A.
---------------------------------------------------------------------------
      In the case of interest expense, the UNICAP rules apply 
only to interest paid or incurred during the property's 
production period\1142\ and that is allocable to property 
produced by the taxpayer or acquired for resale which (1) is 
either real property or property with a class life of at least 
20 years, (2) has an estimated production period exceeding two 
years, or (3) has an estimated production period exceeding one 
year and a cost exceeding $1,000,000.\1143\ The production 
period with respect to any property is the period beginning on 
the date on which production of the property begins, and ending 
on the date on which the property is ready to be placed in 
service or held for sale.\1144\ In the case of property that is 
customarily aged (e.g., tobacco, wine, and whiskey) before it 
is sold, the production period includes the aging period.\1145\
---------------------------------------------------------------------------
    \1142\See Treas. Reg. sec. 1.263A-12.
    \1143\Sec. 263A(f).
    \1144\Sec. 263A(f)(4)(B).
    \1145\See Treas. Reg. sec. 1.263A-12(d)(1). See also TAM 9327007 
(Mar. 31, 1993) (holding that producers of wine must include the time 
that wine ages in bottles as part of the production period, which 
concludes when the wine vintage is officially released to the 
distribution chain).
---------------------------------------------------------------------------
Exceptions from UNICAP
      Section 263A provides a number of exceptions to the 
general capitalization requirements. One such exception exists 
for certain small taxpayers who acquire property for resale and 
have $10 million or less of average annual gross receipts for 
the preceding three-taxable year period;\1146\ such taxpayers 
are not required to include additional section 263A costs in 
inventory.
---------------------------------------------------------------------------
    \1146\Sec. 263A(b)(2)(B). No statutory exception is available for 
small taxpayers who produce property subject to section 263A. However, 
a de minimis rule under Treasury regulations treats producers that use 
the simplified production method and incur total indirect costs of 
$200,000 or less in a taxable year as having no additional indirect 
costs beyond those normally capitalized for financial accounting 
purposes. Treas. Reg. sec. 1.263A-2(b)(3)(iv). However, the Chairman's 
Mark of the ``Tax Cuts and Jobs Act'' proposes to expand the exception 
for small taxpayers from the uniform capitalization rules. Under the 
provision, any producer or reseller that meets the $15 million gross 
receipts test is exempted from the application of section 263A. See 
section III.B.4 of Description of the Chairman's Mark of the ``Tax Cuts 
and Jobs Act'' (JCX-51-17), November 9, 2017.
---------------------------------------------------------------------------
      Another exception exists for taxpayers who raise, 
harvest, or grow trees.\1147\ Under this exception, section 
263A does not apply to trees raised, harvested, or grown by the 
taxpayer (other than trees bearing fruit, nuts, or other crops, 
or ornamental trees) and any real property underlying such 
trees. Similarly, the UNICAP rules do not apply to any animal 
or plant having a reproductive period of two years or less, 
which is produced by a taxpayer in a farming business (unless 
the taxpayer is required to use an accrual method of accounting 
under section 447 or 448(a)(3)).\1148\
---------------------------------------------------------------------------
    \1147\Sec. 263A(c)(5).
    \1148\Sec. 263A(d). See also section III.B.3 of Description of the 
Chairman's Mark of the ``Tax Cuts and Jobs Act'' (JCX-51-17), November 
9, 2017, which expands the universe of farming C corporations that may 
use the cash method to include any farming C corporation that meets the 
$15 million gross receipts test.
---------------------------------------------------------------------------
      Freelance authors, photographers, and artists also are 
exempt from section 263A for any qualified creative 
expenses.\1149\ Qualified creative expenses are defined as 
amounts paid or incurred by an individual in the trade or 
business of being a writer, photographer, or artist. However, 
such term does not include any expense related to printing, 
photographic plates, motion picture files, video tapes, or 
similar items.
---------------------------------------------------------------------------
    \1149\Sec. 263A(h).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment would exclude the aging periods for 
beer, wine, and distilled spirits from the production period 
for purposes of the UNICAP interest capitalization rules. Thus, 
under the provision, producers of beer, wine and distilled 
spirits are able to deduct interest expenses (subject to any 
other applicable limitation) attributable to a shorter 
production period.
      The provision does not apply to interest costs paid or 
accrued after December 31, 2019.
      Effective date.--The provision is effective for interest 
costs paid or accrued after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
8. Reduced rate of excise tax on beer (sec. 13802 of the Senate 
        amendment and sec. 5051 of the Code)

                              PRESENT LAW

      Federal excise taxes are imposed at different rates on 
distilled spirits, wine, and beer and are imposed on these 
products when produced or imported. Generally, these excise 
taxes are administered and enforced by the TTB, except the 
taxes on imported bottled distilled spirits, wine, and beer are 
collected by the Customs and Border Protection Bureau (the 
``CBP'') of the Department of Homeland Security (under 
delegation by the Secretary of the Treasury).
      Liability for the excise tax on beer also come into 
existence when the alcohol is produced but is not payable until 
the beer is removed from the brewery for consumption or sale. 
Generally, beer may be transferred between commonly owned 
breweries without payment of tax; however, tax liability 
follows these products. Imported bulk beer may be released from 
customs custody without payment of tax and transferred in bond 
to a brewery. Beer may be exported without payment of tax and 
may be withdrawn without payment of tax or free of tax from the 
production facility for certain authorized uses, including 
industrial uses and non-beverage uses.
      The rate of tax on beer is $18 per barrel (31 
gallons).\1150\ Small brewers are subject to a reduced tax rate 
of $7 per barrel on the first 60,000 barrels of beer 
domestically produced and removed each year.\1151\ Small 
brewers are defined as brewers producing fewer than two million 
barrels of beer during a calendar year. The credit reduces the 
effective per-gallon tax rate from approximately 58 cents per 
gallon to approximately 22.6 cents per gallon for this beer.
---------------------------------------------------------------------------
    \1150\Sec. 5051.
    \1151\Sec. 5051(a)(2).
---------------------------------------------------------------------------
      In the case of a controlled group, the two million barrel 
limitation for small brewers is applied to the controlled 
group, and the 60,000 barrels eligible for the reduced rate of 
tax, are apportioned among the brewers who are component 
members of such group. The term ``controlled group'' has the 
meaning assigned to it by sec. 1563(a), except that the phrase 
``more than 50 percent'' is substituted for the phrase ``at 
least 80 percent'' in each place it appears in sec. 1563(a).
      Individuals may produce limited quantities of beer for 
personal or family use without payment of tax during each 
calendar year. The limit is 200 gallons per calendar year for 
households of two or more adults and 100 gallons per calendar 
year for single-adult households.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment lowers the rate of tax on beer to 
$16 per barrel on the first six million barrels brewed by the 
brewer or imported by the importer. In general, in the case of 
a controlled group of brewers, the six million barrel 
limitation is applied and apportioned at the level of the 
controlled group. Beer brewed or imported in excess of the six 
million barrel limit would continue to be taxed at $18 per 
barrel. In the case of small brewers, such brewers would be 
taxed at a rate of $3.50 per barrel on the first 60,000 barrels 
domestically produced, and $16 per barrel on any further 
barrels produced. The same rules applicable to controlled 
groups under present law apply with respect to this limitation.
      For barrels of beer that have been brewed or produced 
outside of the United States and imported into the United 
States, the reduced tax rate may be assigned by the brewer to 
any importer of such barrels pursuant to requirements set forth 
by the Secretary of the Treasury in consultation with the 
Secretary of Health and Human Services and the Secretary of the 
Department of Homeland Security. These requirements are to 
include: (1) a limitation to ensure that the number of barrels 
of beer for which the reduced tax rate has been assigned by a 
brewer to any importer does not exceed the number of barrels of 
beer brewed or produced by such brewer during the calendar year 
which were imported into the United States by such importer; 
(2) procedures that allow a brewer and an importer to elect 
whether to receive the reduced tax rate; (3) requirements that 
the brewer provide any information as the Secretary of the 
Treasury determines necessary and appropriate for purposes of 
assignment of the reduced tax rate; and (4) procedures that 
allow for revocation of eligibility of the brewer and the 
importer for the reduced tax rate in the case of erroneous or 
fraudulent information provided in (3) which the Secretary of 
the Treasury deems to be material for qualifying for the 
reduced tax rate.
      Any importer making an election to receive the reduced 
tax rate shall be deemed to be a member of the controlled group 
of the brewer, within the meaning of sec. 1563(a), except that 
the phrase ``more than 50 percent'' is substituted for the 
phrase ``at least 80 percent'' in each place it appears in sec 
1563(a).\1152\
---------------------------------------------------------------------------
    \1152\Members of the controlled group may include foreign 
corporations.
---------------------------------------------------------------------------
      Under rules issued by the Secretary of the Treasury, two 
or more entities (whether or not under common control) that 
produce beer marketed under a similar brand, license, 
franchise, or other arrangement shall be treated as a single 
taxpayer for purposes of the excise tax on beer.
      The provision does not apply for beer removed after 
December 31, 2019.
      Effective date.--The provision is effective for beer 
removed after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
9. Transfer of beer between bonded facilities (sec. 13803 of the Senate 
        amendment and sec. 5414 of the Code)

                              PRESENT LAW

      Federal excise taxes are imposed at different rates on 
distilled spirits, wine, and beer and are imposed on these 
products when produced or imported. Generally, these excise 
taxes are administered and enforced by the TTB, except the 
taxes on imported bottled distilled spirits, wine, and beer are 
collected by the Customs and Border Protection Bureau (the 
``CBP'') of the Department of Homeland Security (under 
delegation by the Secretary of the Treasury). The rate of tax 
on beer is $18 per barrel (31 gallons).\1153\
---------------------------------------------------------------------------
    \1153\Sec. 5051.
---------------------------------------------------------------------------
      Liability for the excise tax on beer also come into 
existence when the alcohol is produced but is not payable until 
the beer is removed from the brewery for consumption or sale. 
Generally, beer may be transferred between commonly owned 
breweries without payment of tax; however, tax liability 
follows these products. Imported bulk beer may be released from 
customs custody without payment of tax and transferred in bond 
to a brewery. Beer may be exported without payment of tax and 
may be withdrawn without payment of tax or free of tax from the 
production facility for certain authorized uses, including 
industrial uses and non-beverage uses.
      Small domestic brewers are subject to a reduced tax rate 
of $7 per barrel on the first 60,000 barrels of beer removed 
each year.\1154\ Small brewers are defined as brewers producing 
fewer than two million barrels of beer during a calendar year. 
The credit reduces the effective per-gallon tax rate from 
approximately 58 cents per gallon to approximately 22.6 cents 
per gallon for this beer.
---------------------------------------------------------------------------
    \1154\Sec. 5051(a)(2).
---------------------------------------------------------------------------
      Individuals may produce limited quantities of beer for 
personal or family use without payment of tax during each 
calendar year. The limit is 200 gallons per calendar year for 
households of two or more adults and 100 gallons per calendar 
year for single-adult households.
Transfer rules and removals without tax
      Certain removals or transfers of beer are exempt from 
tax. Beer may be transferred without payment of the tax between 
bonded premises under certain conditions specified in the 
regulations.\1155\ The tax liability accompanies the beer that 
is transferred in bond. However, beer may only be transferred 
free of tax between breweries if both breweries are owned by 
the same brewer.
---------------------------------------------------------------------------
    \1155\Sec. 5414.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment relaxes the shared ownership 
requirement of section 5414. Thus, under the provision, a 
brewer may transfer beer from one brewery to another without 
incurring tax, provided that: (i) the breweries are owned by 
the same person; (ii) one brewery owns a controlling interest 
in the other; (iii) the same person or persons have a 
controlling interest in both breweries; or (iv) the proprietors 
of the transferring and receiving premises are independent of 
each other, and the transferor has divested itself of all 
interest in the beer so transferred, and the transferee has 
accepted responsibility for payment of the tax.
      For purposes of transferring the tax liability pursuant 
to (iv) above, such relief from liability shall be effective 
from the time of removal from the transferor's bonded premises, 
or from the time of divestment, whichever is later.
      The provision does not apply for calendar quarters 
beginning after December 31, 2019.
      Effective date.--The provision applies to any calendar 
quarters beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
10. Reduced rate of excise tax on certain wine (sec. 13804 of the 
        Senate amendment and sec. 5041 of the Code)

                              PRESENT LAW

In general
      Under present law, excise taxes are imposed at different 
rates on wine, depending on the wine's alcohol content and 
carbonation levels. The following table outlines the present 
rates of tax on wine.
---------------------------------------------------------------------------
    \1156\A ``still wine'' is a non-sparkling wine. Most common table 
wines are still wines.
    \1157\A wine gallon is a U.S. liquid gallon.

------------------------------------------------------------------------
          Tax (and Code Section)                      Tax Rates
------------------------------------------------------------------------
  Wines (sec. 5041)
    ``Still wines''\1156\ not more than 14  $1.07 per wine gallon\1157\
     percent alcohol.
    ``Still wines'' more than 14 percent,   $1.57 per wine gallon
     but not more than 21 percent, alcohol.
    ``Still wines'' more than 21 percent,   $3.15 per wine gallon
     but not more than 24 percent, alcohol.
    ``Still wines'' more than 24 percent    $13.50 per proof gallon
     alcohol.                                (taxed as distilled
                                             spirits)
    Champagne and other sparkling wines...  $3.40 per wine gallon
    Artificially carbonated wines.........  $3.30 per wine gallon
------------------------------------------------------------------------

      Liability for the excise taxes on wine come into 
existence when the wine is produced but is not payable until 
the wine is removed from the bonded wine cellar or winery for 
consumption or sale. Generally, bulk and bottled wine may be 
transferred in bond between bonded premises; however, tax 
liability follows these products. Bulk natural wine may be 
released from customs custody without payment of tax and 
transferred in bond to a winery. Wine may be exported without 
payment of tax and may be withdrawn without payment of tax or 
free of tax from the production facility for certain authorized 
uses, including industrial uses and non-beverage uses.
Reduced rates and exemptions for certain wine producers
      Wineries having aggregate annual production not exceeding 
250,000 gallons (``small domestic producers'') receive a credit 
against the wine excise tax equal to 90 cents per gallon (the 
amount of a wine tax increase enacted in 1990) on the first 
100,000 gallons of wine domestically produced and removed 
during a calendar year.\1158\ The credit is reduced (but not 
below zero) by one percent for each 1,000 gallons produced in 
excess of 150,000 gallons; the credit does not apply to 
sparkling wines. In the case of a controlled group, the 250,000 
gallon limitation for wineries is applied to the controlled 
group, and the 100,000 gallons eligible for the credit, are 
apportioned among the wineries who are component members of 
such group. The term ``controlled group'' has the meaning 
assigned to it by sec. 1563(a), except that the phrase ``more 
than 50 percent'' is substituted for the phrase ``at least 80 
percent'' in each place it appears in sec 1563(a).
---------------------------------------------------------------------------
    \1158\Sec. 5041(c).
---------------------------------------------------------------------------
      Individuals may produce limited quantities of wine for 
personal or family use without payment of tax during each 
calendar year. The limit is 200 gallons per calendar year for 
households of two or more adults and 100 gallons per calendar 
year for single-adult households.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment modifies the credit against the wine 
excise tax for small domestic producers, by removing the 
250,000 wine gallon domestic production limitation (and thus 
making the credit available for all wine producers and 
importers). Additionally, under the provision, sparkling wine 
producers and importers are now eligible for the credit. With 
respect to wine produced in, or imported into, the United 
States during a calendar year, the credit amount is (1) $1.00 
per wine gallon for the first 30,000 wine gallons of wine, 
plus; (2) 90 cents per wine gallon on the next 100,000 wine 
gallons of wine, plus; (3) 53.5 cents per wine gallon on the 
next 620,000 wine gallons of wine.\1159\ There is no phaseout 
of the credit.
---------------------------------------------------------------------------
    \1159\The credit rate for hard cider is tiered at the same level of 
production or importation, but is equal to 6.2 cents, 5.6 cents and 3.3 
cents, respectively.
---------------------------------------------------------------------------
      In the case of any wine gallons of wine that have been 
produced outside of the United States and imported into the 
United States, the tax credit allowable may be assigned by the 
person who produced such wine (the ``foreign producer'') to any 
electing importer of such wine gallons pursuant to requirements 
established by the Secretary of the Treasury, in consultation 
with the Secretary of Health and Human Services and the 
Secretary of the Department of Homeland Security. These 
requirements are to include: (1) a limitation to ensure that 
the number of wine gallons of wine for which the tax credit has 
been assigned by a foreign producer to any importer does not 
exceed the number of wine gallons of wine produced by such 
foreign producer, during the calendar year, which were imported 
into the United States by such importer; (2) procedures that 
allow the election of a foreign producer to assign, and an 
importer to receive, the tax credit; (3) requirements that the 
foreign producer provide any information that the Secretary of 
the Treasury determines to be necessary and appropriate for 
purposes of assigning the tax credit; and (4) procedures that 
allow for revocation of eligibility of the foreign producer and 
the importer for the tax credit in the case of erroneous or 
fraudulent information provided in (3) which the Secretary of 
the Treasury deems to be material for qualifying for the 
reduced tax rate.
      Any importer making an election to receive the reduced 
tax rate shall be deemed to be a member of the controlled group 
of the winemaker, within the meaning of sec. 1563(a), except 
that the phrase ``more than 50 percent'' is substitute for the 
phrase ``at least 80 percent'' in each place it appears in sec 
1563(a).\1160\
---------------------------------------------------------------------------
    \1160\Members of the controlled group may include foreign 
corporations.
---------------------------------------------------------------------------
      The provision does not apply for wine removed in calendar 
quarters beginning after December 31, 2019.
      Effective date.--The provision applies to wine removed 
after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
11. Adjustment of alcohol content level for application of excise tax 
        rates (sec. 13805 of the Senate amendment and sec. 5041 of the 
        Code)

                              PRESENT LAW

In general
      Under present law, excise taxes are imposed at different 
rates on wine, depending on the wine's alcohol content and 
carbonation levels. The following table outlines the present 
rates of tax on wine.
---------------------------------------------------------------------------
    \1161\A ``still wine'' is a non-sparkling wine. Most common table 
wines are still wines.
    \1162\A wine gallon is a U.S. liquid gallon.

------------------------------------------------------------------------
          Tax (and Code Section)                      Tax Rates
------------------------------------------------------------------------
Wines (sec. 5041)
    ``Still wines''\1161\ not more than 14  $1.07 per wine gallon\1162\
     percent alcohol.
    ``Still wines'' more than 14 percent,   $1.57 per wine gallon
     but not more than 21 percent, alcohol.
    ``Still wines'' more than 21 percent,   $3.15 per wine gallon
     but not more than 24 percent, alcohol.
    ``Still wines'' more than 24 percent    $13.50 per proof gallon
     alcohol.                                (taxed as distilled
                                             spirits)
    Champagne and other sparkling wines...  $3.40 per wine gallon
    Artificially carbonated wines.........  $3.30 per wine gallon
------------------------------------------------------------------------

      Liability for the excise taxes on wine come into 
existence when the wine is produced but is not payable until 
the wine is removed from the bonded wine cellar or winery for 
consumption or sale. Generally, bulk and bottled wine may be 
transferred in bond between bonded premises; however, tax 
liability follows these products. Bulk natural wine may be 
released from customs custody without payment of tax and 
transferred in bond to a winery. Wine may be exported without 
payment of tax and may be withdrawn without payment of tax or 
free of tax from the production facility for certain authorized 
uses, including industrial uses and non-beverage uses.
Reduced rates and exemptions for certain wine producers
      Wineries having aggregate annual production not exceeding 
250,000 gallons (``small domestic producers'') receive a credit 
against the wine excise tax equal to 90 cents per gallon (the 
amount of a wine tax increase enacted in 1990) on the first 
100,000 gallons of wine domestically produced and removed 
during a calendar year.\1163\ The credit is reduced (but not 
below zero) by one percent for each 1,000 gallons produced in 
excess of 150,000 gallons; the credit does not apply to 
sparkling wines. In the case of a controlled group, the 250,000 
gallon limitation for wineries is applied to the controlled 
group, and the 100,000 gallons eligible for the credit, are 
apportioned among the wineries who are component members of 
such group. The term ``controlled group'' has the meaning 
assigned to it by sec. 1563(a), except that the phrase ``more 
than 50 percent'' is substituted for the phrase ``at least 80 
percent'' in each place it appears in sec. 1563(a).
---------------------------------------------------------------------------
    \1163\Sec. 5041(c).
---------------------------------------------------------------------------
      Individuals may produce limited quantities of wine for 
personal or family use without payment of tax during each 
calendar year. The limit is 200 gallons per calendar year for 
households of two or more adults and 100 gallons per calendar 
year for single-adult households.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment modifies alcohol-by-volume levels of 
the first two tiers of the excise tax on wine, by changing 14 
percent to 16 percent. Thus, under the provision, a wine 
producer or importer may produce or import ``still wine'' that 
has an alcohol-by-volume level of up to 16 percent, and remain 
subject to the lowest rate of $1.07 per wine gallon.
      The provision does not apply to wine removed after 
December 31, 2019.
      Effective date.--The provision applies to wine removed 
after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
12. Definition of mead and low alcohol by volume wine (sec. 13806 of 
        the Senate amendment and sec. 5041 of the Code)

                              PRESENT LAW

In general
      Under present law, excise taxes are imposed at different 
rates on wine, depending on the wine's alcohol content and 
carbonation levels. The following table outlines the present 
rates of tax on wine.
---------------------------------------------------------------------------
    \1164\A ``still wine'' is a non-sparkling wine. Most common table 
wines are still wines.
    \1165\A wine gallon is a U.S. liquid gallon.

------------------------------------------------------------------------
          Tax (and Code Section)                      Tax Rates
------------------------------------------------------------------------
Wines (sec. 5041)
    ``Still wines''\1164\ not more than 14  $1.07 per wine gallon\1165\
     percent alcohol.
    ``Still wines'' more than 14 percent,   $1.57 per wine gallon
     but not more than 21 percent, alcohol.
    ``Still wines'' more than 21 percent,   $3.15 per wine gallon
     but not more than 24 percent, alcohol.
    ``Still wines'' more than 24 percent    $13.50 per proof gallon
     alcohol.                                (taxed as distilled
                                             spirits)
    Champagne and other sparkling wines...  $3.40 per wine gallon
    Artificially carbonated wines.........  $3.30 per wine gallon
------------------------------------------------------------------------

      Liability for the excise taxes on wine come into 
existence when the wine is produced but is not payable until 
the wine is removed from the bonded wine cellar or winery for 
consumption or sale. Generally, bulk and bottled wine may be 
transferred in bond between bonded premises; however, tax 
liability follows these products. Bulk natural wine may be 
released from customs custody without payment of tax and 
transferred in bond to a winery. Wine may be exported without 
payment of tax and may be withdrawn without payment of tax or 
free of tax from the production facility for certain authorized 
uses, including industrial uses and non-beverage uses.
Reduced rates and exemptions for certain wine producers
      Wineries having aggregate annual production not exceeding 
250,000 gallons (``small domestic producers'') receive a credit 
against the wine excise tax equal to 90 cents per gallon (the 
amount of a wine tax increase enacted in 1990) on the first 
100,000 gallons of wine domestically produced and removed 
during a calendar year.\1166\ The credit is reduced (but not 
below zero) by one percent for each 1,000 gallons produced in 
excess of 150,000 gallons; the credit does not apply to 
sparkling wines. In the case of a controlled group, the 250,000 
gallon limitation for wineries is applied to the controlled 
group, and the 100,000 gallons eligible for the credit, are 
apportioned among the wineries who are component members of 
such group. The term ``controlled group'' has the meaning 
assigned to it by sec. 1563(a), except that the phrase ``more 
than 50 percent'' is substituted for the phrase ``at least 80 
percent'' in each place it appears in sec 1563(a).
---------------------------------------------------------------------------
    \1166\Sec. 5041(c).
---------------------------------------------------------------------------
      Individuals may produce limited quantities of wine for 
personal or family use without payment of tax during each 
calendar year. The limit is 200 gallons per calendar year for 
households of two or more adults and 100 gallons per calendar 
year for single-adult households.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment designates mead and certain 
sparkling wines to be taxed at the lowest rate applicable to 
``still wine,'' of $1.07 per wine gallon of wine. Mead is 
defined as a wine that contains not more than 0.64 grams of 
carbon dioxide per hundred milliliters of wine,\1167\ which is 
derived solely from honey and water, contains no fruit product 
or fruit flavoring, and contains less than 8.5 percent alcohol-
by-volume. The sparkling wines eligible to be taxed at the 
lowest rate are those wines that contain not more than 0.64 
grams of carbon dioxide per hundred milliliters of wine,\1168\ 
which are derived primarily from grapes or grape juice 
concentrate and water, which contain no fruit flavoring other 
than grape, and which contain less than 8.5 percent alcohol by 
volume.
---------------------------------------------------------------------------
    \1167\The Secretary is authorized to prescribe tolerances to this 
limitation as may be reasonably necessary in good commercial practice.
    \1168\The Secretary is authorized to prescribe tolerances to this 
limitation as may be reasonably necessary in good commercial practice.
---------------------------------------------------------------------------
      The provision does not apply to wine removed after 
December 31, 2019.
      Effective date.--The provision applies to wine removed 
after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
13. Reduced rate of excise tax on certain distilled spirits (sec. 13807 
        of the Senate amendment and sec. 5001 of the Code)

                              PRESENT LAW

      An excise tax is imposed on all distilled spirits 
produced in, or imported into, the United States.\1169\ The tax 
liability legally comes into existence the moment the alcohol 
is produced or imported but payment of the tax is not required 
until a subsequent withdrawal or removal from the distillery, 
or, in the case of an imported product, from customs custody or 
bond.\1170\
---------------------------------------------------------------------------
    \1169\Secs. 5001.
    \1170\Secs. 5006, 5043, and 5054. In general, proprietors of 
distilled spirit plants, proprietors of bonded wine cellars, brewers, 
and importers are liable for the tax.
---------------------------------------------------------------------------
      Distilled spirits are taxed at a rate of $13.50 per proof 
gallon.\1171\ Liability for the excise tax on distilled spirits 
comes into existence when the alcohol is produced but is not 
determined and payable until bottled distilled spirits are 
removed from the bonded premises of the distilled spirits plant 
where they are produced. Generally, bulk distilled spirits may 
be transferred in bond between bonded premises; however, tax 
liability follows these products. Imported bulk distilled 
spirits may be released from customs custody without payment of 
tax and transferred in bond to a distillery. Distilled spirits 
be exported without payment of tax and may be withdrawn without 
payment of tax or free of tax from the production facility for 
certain authorized uses, including industrial uses and non-
beverage uses.
---------------------------------------------------------------------------
    \1171\A ``proof gallon'' is a U.S. liquid gallon of proof spirits, 
or the alcoholic equivalent thereof. Generally a proof gallon is a U.S. 
liquid gallon consisting of 50 percent alcohol. On lesser quantities, 
the tax is paid proportionately. Credits are allowed for wine content 
and flavors content of distilled spirits. Sec. 5010.
---------------------------------------------------------------------------
      A portion of the revenues from the distilled spirits 
excise tax imposed on rum imported or brought into\1172\ the 
United States (less certain administrative costs) is 
transferred (``covered over'') to Puerto Rico and the U.S. 
Virgin Islands.\1173\ The amount covered over is $10.50 per 
proof gallon ($13.25 per proof gallon during the period from 
July 1, 1999, through December 31, 2016).
---------------------------------------------------------------------------
    \1172\Because Puerto Rico is inside U.S. customs territory, 
articles entering the United States from that commonwealth are 
``brought into'' rather than ``imported into'' the U.S.
    \1173\Sec. 7652.
---------------------------------------------------------------------------
      Eligible distilled spirits wholesale distributors and 
distillers receive an income tax credit for the average cost of 
carrying previously imposed excise tax on beverages stored in 
their warehouses.\1174\
---------------------------------------------------------------------------
    \1174\Sec. 5011. Section 5011 is administered and enforced by the 
IRS.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment institutes a tiered rate for 
distilled spirits. The rate of tax is lowered to $2.70 per 
proof gallon on the first 100,000 proof gallons of distilled 
spirits, $13.34 for all proof gallons in excess of that amount 
but below 22,130,000 proof gallons, and $13.50 for amounts 
thereafter. The provision contains rules so as to prevent 
members of the same controlled group from receiving the lower 
rate on more than 100,000 proof gallons of distilled spirits. 
Importers of distilled spirits are eligible for the lower 
rates.
      The provision does not apply to distilled spirits removed 
after December 31, 2019.
      Effective date.--The provision applies to distilled 
spirits removed after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
14. Bulk distilled spirits (sec. 13808 of the Senate amendment and sec. 
        5212 of the Code)

                              PRESENT LAW

      An excise tax is imposed on all distilled spirits 
produced in, or imported into, the United States.\1175\ The tax 
liability legally comes into existence the moment the alcohol 
is produced or imported but payment of the tax is not required 
until a subsequent withdrawal or removal from the distillery, 
or, in the case of an imported product, from customs custody or 
bond.\1176\
---------------------------------------------------------------------------
    \1175\Secs. 5001.
    \1176\Secs. 5006, 5043, and 5054. In general, proprietors of 
distilled spirit plants, proprietors of bonded wine cellars, brewers, 
and importers are liable for the tax.
---------------------------------------------------------------------------
      Distilled spirits are taxed at a rate of $13.50 per proof 
gallon.\1177\ Liability for the excise tax on distilled spirits 
comes into existence when the alcohol is produced but is not 
determined and payable until bottled distilled spirits are 
removed from the bonded premises of the distilled spirits plant 
where they are produced. Generally, bulk distilled spirits may 
be transferred in bond between bonded premises; however, tax 
liability follows these products. Additionally, in order to 
transfer such spirits in bond without payment of tax, such 
spirits may not be transferred in containers smaller than one 
gallon.\1178\ Imported bulk distilled spirits may be released 
from customs custody without payment of tax and transferred in 
bond to a distillery. Distilled spirits be exported without 
payment of tax and may be withdrawn without payment of tax or 
free of tax from the production facility for certain authorized 
uses, including industrial uses and non-beverage uses.
---------------------------------------------------------------------------
    \1177\A ``proof gallon'' is a U.S. liquid gallon of proof spirits, 
or the alcoholic equivalent thereof. Generally a proof gallon is a U.S. 
liquid gallon consisting of 50 percent alcohol. On lesser quantities, 
the tax is paid proportionately. Credits are allowed for wine content 
and flavors content of distilled spirits. Sec. 5010.
    \1178\Sec. 5212.
---------------------------------------------------------------------------
      A portion of the revenues from the distilled spirits 
excise tax imposed on rum imported or brought into\1179\ the 
United States (less certain administrative costs) is 
transferred (``covered over'') to Puerto Rico and the U.S. 
Virgin Islands.\1180\ The amount covered over is $10.50 per 
proof gallon ($13.25 per proof gallon during the period from 
July 1, 1999, through December 31, 2016).
---------------------------------------------------------------------------
    \1179\Because Puerto Rico is inside U.S. customs territory, 
articles entering the United States from that commonwealth are 
``brought into'' rather than ``imported into'' the U.S.
    \1180\Sec. 7652.
---------------------------------------------------------------------------
      Eligible distilled spirits wholesale distributors and 
distillers receive an income tax credit for the average cost of 
carrying previously imposed excise tax on beverages stored in 
their warehouses.\1181\
---------------------------------------------------------------------------
    \1181\Sec. 5011. Section 5011 is administered and enforced by the 
IRS.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment allows distillers to transfer 
spirits in approved containers other than bulk containers in 
bond without payment of tax.
      The provision does not apply to distilled spirits 
transferred in bond after December 31, 2019.
      Effective date.--The provision applies to distilled 
spirits transferred in bond after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
15. Modification of tax treatment of Alaska Native Corporations and 
        Settlement Trusts (sec. 13821 of the Senate amendment and sec. 
        6039H and new secs. 139G and 247 of the Code)

                              PRESENT LAW

      The Alaska Native Claims Settlement Act (``ANCSA'')\1182\ 
established Native Corporations\1183\ to hold property for 
Alaska Natives. Alaska Natives are generally the only permitted 
common shareholders of those corporations under section 7(h) of 
ANCSA, unless a Native Corporation specifically allows other 
shareholders under specified procedures.
---------------------------------------------------------------------------
    \1182\43 U.S.C. 1601 et seq.
    \1183\Defined at 43 U.S.C. 1602(m).
---------------------------------------------------------------------------
      ANCSA permits a Native Corporation to transfer money or 
other property to an Alaska Native Settlement Trust 
(``Settlement Trust'') for the benefit of beneficiaries who 
constitute all or a class of the shareholders of the Native 
Corporation, to promote the health, education and welfare of 
beneficiaries and to preserve the heritage and culture of 
Alaska Natives.\1184\
---------------------------------------------------------------------------
    \1184\With certain exceptions, once an Alaska Native Corporation 
has made a conveyance to a Settlement Trust, the assets conveyed shall 
not be subject to attachment, distraint, or sale or execution of 
judgment, except with respect to the lawful debts and obligations of 
the Settlement Trust.
---------------------------------------------------------------------------
      Native Corporations and Settlement Trusts, as well as 
their shareholders and beneficiaries, are generally subject to 
tax under the same rules and in the same manner as other 
taxpayers that are corporations, trusts, shareholders, or 
beneficiaries.
      Special tax rules enacted in 2001 allow an election to 
use a more favorable tax regime for transfers of property by a 
Native Corporation to a Settlement Trust and for income 
taxation of the Settlement Trust. There is also simplified 
reporting to beneficiaries.
      Under the special tax rules, a Settlement Trust may make 
an irrevocable election to pay tax on taxable income at the 
lowest rate specified for individuals, (rather than the highest 
rate that is generally applicable to trusts) and to pay tax on 
capital gains at a rate consistent with being subject to such 
lowest rate of tax. As described further below, beneficiaries 
may generally thereafter exclude from gross income 
distributions from a trust that has made this election. Also, 
contributions from a Native Corporation to an electing 
Settlement Trust generally will not result in the recognition 
of gross income by beneficiaries on account of the 
contribution. An electing Settlement Trust remains subject to 
generally applicable requirements for classification and 
taxation as a trust.
      A Settlement Trust distribution is excludable from the 
gross income of beneficiaries to the extent of the taxable 
income of the Settlement Trust for the taxable year and all 
prior taxable years for which an election was in effect, 
decreased by income tax paid by the Trust, plus tax-exempt 
interest from State and local bonds for the same period. 
Amounts distributed in excess of the amount excludable is taxed 
to the beneficiaries as if distributed by the sponsoring Native 
Corporation in the year of distribution by the Trust, which 
means that the beneficiaries must include in gross income as 
dividends the amount of the distribution, up to the current and 
accumulated earnings and profits of the Native Corporation. 
Amounts distributed in excess of the current and accumulated 
earnings and profits are not included in gross income by the 
beneficiaries.
      A special loss disallowance rule reduces (but not below 
zero) any loss that would otherwise be recognized upon 
disposition of stock of a sponsoring Native Corporation by a 
proportion, determined on a per share basis, of all 
contributions to all electing Settlement Trusts by the 
sponsoring Native Corporation. This rule prevents a stockholder 
from being able to take advantage of a decrease in value of a 
Native Corporation that is caused by a transfer of assets from 
the Native Corporation to a Settlement Trust.
      The fiduciary of an electing Settlement Trust is 
obligated to provide certain information relating to 
distributions from the trust in lieu of reporting requirements 
under Section 6034A.
      The election to pay tax at the lowest rate is not 
available in certain disqualifying cases where transfer 
restrictions have been modified to allow a transfer of either: 
(a) a beneficial interest that would not be permitted by 
section 7(h) of the Alaska Native Claims Settlement Act if the 
interest were Settlement common stock, or (b) any stock in an 
Alaska Native Corporation that would not be permitted by 
section 7(h) if it were Settlement common stock and the Native 
Corporation thereafter makes a transfer to the Trust. Where an 
election is already in effect at the time of such disqualifying 
transfers, the special rules applicable to an electing trust 
cease to apply and rules generally applicable to trusts apply. 
In addition, the distributable net income of the trust is 
increased by undistributed current and accumulated earnings and 
profits of the trust, limited by the fair market value of trust 
assets at the date the trust becomes so disposable. The effect 
is to cause the trust to be taxed at regular trust rates on the 
amount of recomputed distributable net income not distributed 
to beneficiaries, and to cause the beneficiaries to be taxed on 
the amount of any distributions received consistent with the 
applicable tax rate bracket.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision comprises three separate but related 
sections. The first section allows a Native Corporation to 
assign certain payments described in ANCSA to a Settlement 
Trust without having to recognize gross income from those 
payments, provided the assignment is in writing and the Native 
Corporation has not received the payment prior to assignment. 
The Settlement Trust is required to include the assigned 
payment in gross income when received.
      The second section allows a Native Corporation to elect 
annually to deduct contributions made to a Settlement Trust. If 
the contribution is in cash, the deduction is in the amount of 
cash contributed. If the contribution is property other than 
cash, the deduction is the amount of the Native Corporation's 
basis in the contributed property (or the fair market value of 
such property, if less than the Native Corporation's basis), 
and no gain or loss can be recognized on the contribution. The 
Native Corporation's deduction is limited to the amount of its 
taxable income for that year, and any unused deduction may be 
carried forward 15 additional years. The Native Corporation's 
earnings and profits for the taxable year are reduced by the 
amount of any deduction claimed for that year.
      Generally, the Settlement Trust must include income equal 
to the deduction by the Native Corporation. For contributions 
of property other than cash, the Settlement Trust takes a basis 
in the property equal to its basis in the hands of the Native 
Corporation immediately before the contribution (or the fair 
market value of such property, if less than the Native 
Corporation's basis), and may elect to defer recognition of 
income associated with such property until the Settlement Trust 
sells or disposes of the property. In that case, any income 
that is deferred (i.e., the amount of income that would have 
been included upon contribution absent the election to defer) 
is treated as ordinary income, while any gain in excess of the 
amount that is deferred takes the same character as if the 
election had not been made. If property subject to this 
election is disposed of within the first taxable year 
subsequent to the taxable year in which the property was 
contributed to the Settlement Trust, the election is voided 
with respect to the property, and the Settlement Trust is 
required to pay any tax applicable to the disposition of the 
property, including interest, as well as a penalty of 10 
percent of the amount of the tax. The provision provides for a 
four year assessment period in which to assess the tax, 
interest, and penalty amounts. The provision permits the 
amendment of the terms of any Settlement Trust agreement to 
allow this election within one year of the enactment of the 
provision, with certain restrictions.
      The third section of the provision requires any Native 
Corporation which has made an election to deduct contributions 
to a Settlement Trust as described above to furnish a statement 
to the Settlement Trust containing: (1) the total amount of 
contributions; (2) whether such contribution was in cash; (3) 
for non-cash contributions, the date that such property was 
acquired by the Native Corporation and the adjusted basis of 
such property on the contribution date; (4) the date on which 
each contribution was made to the Settlement Trust; and (5) 
such information as the Secretary determines is necessary for 
the accurate reporting of income relating to such 
contributions.
      Effective date.--The provision relating to the exclusion 
for ANCSA payments assigned to Settlement Trusts is effective 
to taxable years beginning after December 31, 2016.
      The provision relating to the deduction of contributions 
is effective for taxable years for which the Native 
Corporation's refund statute of limitations period has not 
expired, and the provision provides a one-year waiver of the 
refund statute of limitations period in the event that the 
limitation period expires before the end of the one-year period 
beginning on the date of enactment.
      The provision relating to the reporting requirement 
applies to taxable years beginning after December 31, 2016.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
16. Amounts paid for aircraft management services (sec. 13822 of the 
        Senate amendment and sec. 4261 of the Code)

                              PRESENT LAW

Excise tax on taxable transportation by air
      For domestic passenger transportation, section 4261 
imposes an excise tax on amounts paid for taxable 
transportation. In general, for domestic flights, the tax 
consists of two parts: a 7.5 percent ad valorem tax applied to 
the amount paid and a flat dollar amount for each flight 
segment (consisting of one takeoff and one landing). ``Taxable 
transportation'' generally means transportation by air which 
begins and ends in the United States. The tax is paid by the 
person making the payment subject to tax and the tax is 
collected by the person receiving the payment. For commercial 
freight aviation, the ad valorem tax is 6.25 percent of the 
amount paid for transportation.
      In determining whether a flight constitutes taxable 
transportation and whether the amounts paid for such 
transportation are subject to tax, the Internal Revenue Service 
(``IRS'') has looked at who has ``possession, command, and 
control'' of the aircraft based on the relevant facts and 
circumstances.\1185\
---------------------------------------------------------------------------
    \1185\See, e.g., Rev. Rul. 60-311, 1960-2 C.B. 341, which held 
that, since the company in question retains the elements of possession, 
command, and control of the aircraft and performs all services in 
connection with the operation of the aircraft, the company is, in fact, 
furnishing taxable transportation to the lessee; and the tax on the 
transportation of persons applies to the portion of the total payment 
which is allocable to the transportation of persons, provided such 
allocation is made on a fair and reasonable basis. If no allocation is 
made, the tax applies to the total payment for the lease of the 
aircraft.
---------------------------------------------------------------------------
Applicability to aircraft management services
      Generally, an aircraft management services company 
(``management company'') has as its business purpose the 
management of aircraft owned by other corporations or 
individuals (``aircraft owners''). In this function, management 
companies provide aircraft owners, among other things, with 
administrative and support services (such as scheduling, flight 
planning, and weather forecasting), aircraft maintenance 
services, the provision of pilots and crew, and compliance with 
regulatory standards. Although the arrangement between 
management companies and aircraft owners may vary, it is our 
understanding that aircraft owners generally pay management 
companies a monthly fee to cover the fixed expenses of 
maintaining the aircraft (such as insurance, maintenance, and 
recordkeeping) and a variable fee to cover the cost of using 
the aircraft (such as the provision of pilots, crew, and fuel).
      In March 2012, the IRS issued a Chief Counsel Advice 
determining that a management company provided all of the 
essential elements necessary for providing transportation by 
air and the owner relinquished possession, command and control 
to the management company.\1186\ Thus, the management company 
was determined to be providing taxable transportation to the 
owner and was required to collect the appropriate federal 
excise tax from the aircraft owner and remit it to the IRS. The 
Chief Counsel Advice resulted in increased audit activity by 
the IRS on aircraft management companies.
---------------------------------------------------------------------------
    \1186\CCA 2012-10026 (March, 2012).
---------------------------------------------------------------------------
      In May 2013, the IRS suspended assessment of the federal 
excise tax with respect to aircraft management services while 
it developed guidance on the tax treatment of aircraft 
management issues. In a 2015 opinion,\1187\ an Ohio district 
court held that the existing revenue rulings (in effect for the 
tax period April 1, 2005, through June 30, 2009, the period 
that was the subject of the litigation) regarding the 
possession, command and control test, failed to provide precise 
and not speculative notice of a collection obligation as it 
related to whole-aircraft management contracts.\1188\ As a 
result, the court ruled as a matter of law that because precise 
and not speculative notice was not received, the aircraft 
management company plaintiff did not have a collection 
obligation with respect to the Federal excise tax on payments 
received for whole-aircraft management services.
---------------------------------------------------------------------------
    \1187\Netjets Large Aircraft Inc. v. United States, 116 A.F.T.R. 
2d. 2015-6776 (S.D. Ohio, 2015).
    \1188\The district court held that such notice is required to 
persons having a deputy tax collection obligation under the rationale 
of the Supreme Court's holding in Central Illinois Public Service 
Company v. United States, 435 U.S. 21 (1978).
---------------------------------------------------------------------------
      In 2017, the IRS decided not to pursue examination of the 
issue of whether amounts paid to aircraft companies by the 
owners or lessors of the aircraft are taxable until further 
guidance is made available. According to the IRS, for any exam 
in suspense the aircraft management fee issue was conceded and 
the taxpayers were notified accordingly.\1189\ The IRS has not 
issued further guidance on this issue.
---------------------------------------------------------------------------
    \1189\See also, Kerry Lynch, IRS To Shelve Pending Audits on 
Aircraft Management Fees, AINonline (July 17, 2017) http://
www.ainonline.com/aviation-news/business-aviation/2017-07-17/irs-
shelve-pending-audits-aircraft-management-fees.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment exempts certain payments related to 
the management of private aircraft from the excise taxes 
imposed on taxable transportation by air. Exempt payments are 
those amounts paid by an aircraft owner for management services 
related to maintenance and support of the owner's aircraft or 
flights on the owner's aircraft. Applicable services include 
support activities related to the aircraft itself, such as its 
storage, maintenance, and fueling, and those related to its 
operation, such as the hiring and training of pilots and crew, 
as well as administrative services such as scheduling, flight 
planning, weather forecasting, obtaining insurance, and 
establishing and complying with safety standards. Aircraft 
management services also include such other services as are 
necessary to support flights operated by an aircraft owner.
      Payments for flight services are exempt only to the 
extent that they are attributable to flights on an aircraft 
owner's own aircraft.\1190\ Thus, if an aircraft owner makes a 
payment to a management company for the provision of a pilot 
and the pilot provides his services on the aircraft owner's 
aircraft, such payment is not subject to Federal excise tax. 
However, if the pilot provides his services to the aircraft 
owner on an aircraft other than the aircraft owner's (for 
instance, on an aircraft that is part of a fleet of aircraft 
available for third-party charter services), then such payment 
is subject to Federal excise tax.
---------------------------------------------------------------------------
    \1190\Examples of arrangements that cannot qualify a person as an 
``aircraft owner'' include ownership of stock in a commercial airline 
and participation in a fractional ownership aircraft program. Ownership 
of stock in a commercial airline cannot qualify an individual as an 
``aircraft owner'' of a commercial airline's aircraft, and amounts paid 
for transportation on such flights remain subject to the tax under 
section 4261. Similarly, participation in a fractional ownership 
aircraft program does not constitute ``aircraft ownership'' for 
purposes of this standard. Amounts paid to a fractional ownership 
aircraft program for transportation under such a program are exempt 
from the ticket tax under section 4261(j) if the aircraft is operating 
under subpart K of part 91 of title 14 of the Code of Federal 
Regulations (``subpart K''), and flights under such program are subject 
to both the fuel tax levied on non-commercial aviation an additional 
fuel surtax under section 4043 of the Code. A business arrangement 
seeking to circumvent that surtax by operating outside of subpart K, 
allowing an aircraft owner the right to use any of a fleet of aircraft, 
be it through an aircraft interchange agreement, through holding 
nominal shares in a fleet of aircraft, or any other arrangement that 
does not reflect true tax ownership of the aircraft being flown upon, 
is not considered ownership for purposes of the provision.
---------------------------------------------------------------------------
      The provision provides a pro rata allocation rule in the 
event that a monthly payment made to a management company is 
allocated in part to exempt services and flights on the 
aircraft owner's aircraft, and in part to flights on aircraft 
other than the aircraft owner's. In such a circumstance, 
Federal excise tax must be collected on that portion of the 
payment attributable to flights on aircraft not owned by the 
aircraft owner.
      Under the provision, a lessee of an aircraft is 
considered an aircraft owner provided that the lease is not a 
``disqualified lease.'' A disqualified lease is any lease of an 
aircraft from a management company (or a related party) for a 
term of 31 days or less.
      Effective date.--The provision is effective for amounts 
paid after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
      Effective date.--The provision is effective for amounts 
paid after the date of enactment.
17. Opportunity zones (sec. 13823 of the Senate amendment and new secs. 
        1400Z-1 and 1400Z-2 of the Code)

                              PRESENT LAW

      The Code occasionally has provided several incentives 
aimed at encouraging economic growth and investment in 
distressed communities by providing Federal tax benefits to 
businesses located within designated boundaries.\1191\
---------------------------------------------------------------------------
    \1191\Such designated areas were referred to as empowerment zones, 
the District of Columbia Enterprise (``DC'') Zone, and the Gulf 
Opportunity (``GO'') Zone, and each of these designations and attendant 
tax incentives have expired. The designations and tax incentives for 
the DC Zone, and the GO Zone generally expired after December 31, 2011. 
1400(f), 1400N(h), 1400N(c)(5), 1400N(a)(2)(D), 1400N(a)(7)(C), 
1400N(d). The empowerment zones program and attendant tax incentives 
expired as of December 31, 2016. Secs. 1391(d)(1). There are also areas 
that were designated as renewal communities under section 1400E which 
received tax benefits that all expired as of December 31, 2009, except 
that a zero-percent capital gains rate applies with respect to gain 
from the sale through December 31, 2014 of a qualified community asset 
acquired after December 31, 2001, and before January 1, 2010 and held 
for more than five years. For more information on these programs and 
attendant tax incentives, see Joint Committee on Taxation, Incentives 
for Distressed Communities: Empowerment Zones and Renewal Communities 
(JCX-38-09), October 5, 2009.
---------------------------------------------------------------------------
      One of these incentives is a federal income tax credit 
that is allowed in the aggregate amount of 39 percent of a 
taxpayer investment in a qualified community development entity 
(CDE).\1192\ In general, the credit is allowed to a taxpayer 
who makes a ``qualified equity investment'' in a CDE which 
further invests in a ``qualified active low-income community 
business.'' CDEs are required to make investments in low income 
communities (generally communities with 20 percent or greater 
poverty rate or median family income less than 80 percent of 
statewide median). The credit is allowed over seven years, five 
percent in each of the first three years and six percent in 
each of the next four years. The credit is recaptured if at any 
time during the seven-year period that begins on the date of 
the original issue of the investment the entity (1) ceases to 
be a qualified CDE, (2) the proceeds of the investment cease to 
be used as required, or (3) the equity investment is redeemed. 
The Department of Treasury's Community Development Financial 
Institutions Fund (``CDFI'') allocates the new markets tax 
credits.
---------------------------------------------------------------------------
    \1192\Sec. 45D.
---------------------------------------------------------------------------
      The maximum annual amount of qualified equity investments 
is $3.5 billion for calendar years 2010 through 2019. The new 
markets tax credit is set to expire on December 31, 2019. No 
amount of unused allocation limitation may be carried to any 
calendar year after 2024.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides for the temporary deferral of 
inclusion in gross income for capital gains reinvested in a 
qualified opportunity fund and the permanent exclusion of 
capital gains from the sale or exchange of an investment in the 
qualified opportunity fund.
      The provision allows for the designation of certain low-
income community population census tracts as qualified 
opportunity zones, where low-income communities are defined in 
Section 45D(e). The designation of a population census tract as 
a qualified opportunity zone remains in effect for the period 
beginning on the date of the designation and ending at the 
close of the tenth calendar year beginning on or after the date 
of designation.
      Governors may submit nominations for a limited number of 
opportunity zones to the Secretary for certification and 
designation. If the number of low-income communities in a State 
is less than 100, the Governor may designate up to 25 tracts, 
otherwise the Governor may designate tracts not exceeding 25 
percent of the number of low-income communities in the State. 
Governors are required to provide particular consideration to 
areas that: (1) are currently the focus of mutually reinforcing 
state, local, or private economic development initiatives to 
attract investment and foster startup activity; (2) have 
demonstrated success in geographically targeted development 
programs such as promise zones, the new markets tax credit, 
empowerment zones, and renewal communities; and (3) have 
recently experienced significant layoffs due to business 
closures or relocations.
      The provision provides two main tax incentives to 
encourage investment in qualified opportunity zones. First, it 
allows for the temporary deferral of inclusion in gross income 
for capital gains that are reinvested in a qualified 
opportunity fund. A qualified opportunity fund is an investment 
vehicle organized as a corporation or a partnership for the 
purpose of investing in qualified opportunity zone property 
(other than another qualified opportunity fund) that holds at 
least 90 percent of its assets in qualified opportunity zone 
property. The provision intends that the certification process 
for a qualified opportunity fund will be done in a manner 
similar to the process for allocating the new markets tax 
credit. The provision provides the Secretary authority to carry 
out the process.
      If a qualified opportunity fund fails to meet the 90 
percent requirement and unless the fund establishes reasonable 
cause, the fund is required to pay a monthly penalty of the 
excess of the amount equal to 90 percent of its aggregate 
assets, over the aggregate amount of qualified opportunity zone 
property held by the fund multiplied by the underpayment rate 
in the Code. If the fund is a partnership, the penalty is taken 
into account proportionately as part of each partner's 
distributive share.
      Qualified opportunity zone property includes: any 
qualified opportunity zone stock, any qualified opportunity 
zone partnership interest, and any qualified opportunity zone 
business property.
      The maximum amount of the deferred gain is equal to the 
amount invested in a qualified opportunity fund by the taxpayer 
during the 180-day period beginning on the date of sale of the 
asset to which the deferral pertains. For amounts of the 
capital gains that exceed the maximum deferral amount, the 
capital gains must be recognized and included in gross income 
as under present law.
      If the investment in the qualified opportunity zone fund 
is held by the taxpayer for at least five years, the basis on 
the original gain is increased by 10 percent of the original 
gain. If the opportunity zone asset or investment is held by 
the taxpayer for at least seven years, the basis on the 
original gain is increased by an additional 5 percent of the 
original gain. The deferred gain is recognized on the earlier 
of the date on which the qualified opportunity zone investment 
is disposed of or December 31, 2026. Only taxpayers who 
rollover capital gains of non-zone assets before December 31, 
2026, will be able to take advantage of the special treatment 
of capital gains for non-zone and zone realizations under the 
provision.
      The basis of an investment in a qualified opportunity 
zone fund immediately after its acquisition is zero. If the 
investment is held by the taxpayer for at least five years, the 
basis on the investment is increased by 10 percent of the 
deferred gain. If the investment is held by the taxpayer for at 
least seven years, the basis on the investment is increased by 
an additional five percent of the deferred gain. If the 
investment is held by the taxpayer until at least December 31, 
2026, the basis in the investment increases by the remaining 85 
percent of the deferred gain.
      The second main tax incentive in the bill excludes from 
gross income the post-acquisition capital gains on investments 
in opportunity zone funds that are held for at least 10 years. 
Specifically, in the case of the sale or exchange of an 
investment in a qualified opportunity zone fund held for more 
than 10 years, at the election of the taxpayer the basis of 
such investment in the hands of the taxpayer shall be the fair 
market value of the investment at the date of such sale or 
exchange. Taxpayers can continue to recognize losses associated 
with investments in qualified opportunity zone funds as under 
current law.
      The Secretary or the Secretary's delegate is required to 
report annually to Congress on the opportunity zone incentives 
beginning 5 years after the date of enactment. The report is to 
include an assessment of investments held by the qualified 
opportunity fund nationally and at the State level. To the 
extent the information is available, the report is to include 
the number of qualified opportunity funds, the amount of assets 
held in qualified opportunity funds, the composition of 
qualified opportunity fund investments by asset class, and the 
percentage of qualified opportunity zone census tracts 
designated under the provision that have received qualified 
opportunity fund investments. The report is also to include an 
assessment of the impacts and outcomes of the investments in 
those areas on economic indicators including job creation, 
poverty reduction and new business starts, and other metrics as 
determined by the Secretary.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement generally follows the Senate 
amendment with the following modifications. First, the 
provision provides that each population census tract in each 
U.S. possession that is a low-income community is deemed 
certified and designated as a qualified opportunity zone 
effective on the date of enactment. Second, the provision 
clarifies that chief executive officer of the State (which 
includes the District of Columbia) may submit nominations for a 
limited number of opportunity zones to the Secretary for 
certification and designation. This change clarifies that the 
mayor of the District of Columbia may also submit nominations. 
Third, the provision clarifies that there is no gain deferral 
available with respect to any sale or exchange made after 
December 31, 2026, and there is no exclusion available for 
investments in qualified opportunity zones made after December 
31, 2026. The agreement also makes some technical changes to 
the Senate amendment to make it clear which taxpayer may claim 
the tax benefits.
18. Provisions relating to the low-income housing credit (secs. 13411 
        and 13412 of the Senate amendment and sec. 42 of the Code)

                              PRESENT LAW

In general
      The low-income housing credit may be claimed over a 10-
year period for the cost of building rental housing a 
sufficient portion of which is rent restricted and occupied by 
tenants having incomes below specified levels.\1193\ Qualified 
basis is the low-income portion of the building times the 
eligible basis. The amount of the credit for any taxable year 
in the credit period is the applicable percentage of the 
qualified basis of each qualified low-income building. The 
applicable percentage for new buildings that are not Federally 
subsidized, is computed to yield a present value of 70 percent 
of the qualified basis over a 10-year period. For other 
buildings the applicable percentage is calculated to yield 30 
percent. Rehabilitation expenses are treated as a separate new 
building.
---------------------------------------------------------------------------
    \1193\Sec. 42.
---------------------------------------------------------------------------
Increase in credit for certain high cost areas
      In the case of a building located in a qualified census 
tract or difficult development area, the eligible basis of a 
building is 130 percent of eligible basis. This ``basis boost 
also applies to rehabilitation expenditures that are treated as 
a separate new building.
      A ``difficult development area'' is an area designated by 
the Secretary of Housing and Urban Development (``HUD'') as 
having high construction, land, and utility costs relative to 
the area's median income. The portions of metropolitan 
statistical areas that may be designated for this purpose 
cannot exceed an aggregate area having 20 percent of the 
population of such metropolitan statistical areas. A comparable 
rule applies to nonmetropolitan areas.
      A ``qualified census tract'' means any census tract which 
is designated by HUD in which either: (1) 50 percent or more of 
the households have an income which is less than 60 percent of 
the area median income for the year; or (2) the poverty rate in 
that tract is 25 percent. The portion of a metropolitan 
statistical area that may be designated for this purpose cannot 
exceed an area having 20 percent of the population of such 
metropolitan statistical area. Each metropolitan statistical 
area is treated as a separate area and all nonmetropolitan 
areas in a State are treated as one area.
      In addition, a building which is designated by a State 
housing credit agency as requiring an increase in credit to be 
financially feasible is treated as located in a HUD-designated 
difficult development area. This rule does not apply to a 
building if any portion of the eligible basis is financed with 
tax-exempt bonds.
General public use
      In order to be eligible for the low-income housing 
credit, the residential units in a qualified low-income housing 
project must be available for use by the general public. A 
project is available for general public use if the project 
complies with housing non-discrimination policies including 
those set forth in the Fair Housing Act (42 U.S.C. sec. 3601) 
and (2) the project does not restrict occupancy based on 
membership in a social organization or employment by specific 
employers. In addition, any residential unit that is part of a 
hospital, nursing home, sanitarium, lifecare facility, trailer 
park, or intermediate care facility for the mentally or 
physically handicapped is not available for use by the general 
public.
      However, a project that otherwise meets the general 
public use requirements above shall not fail to meet the 
general public use requirement solely because of occupancy 
restrictions or preferences that favor tenants with (1) special 
needs; (2) who are members of a specified group under a Federal 
program or State program or policy that supports housing for 
such specified group; or (3) who are involved in artistic or 
literary activities.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Treatment of veterans' preference as not violating general public use 
        requirements
      The provision replaces the exception to the general 
public use requirement for tenants engaged in artistic and 
literary activities with an exception for veterans.
Increase in credit for certain rural housing
      For buildings eligible for the 70 percent present-value 
credit, the provision makes two changes. First, the provision 
treats such buildings located in rural areas (as defined in 
section 520 of the Fair Housing Act of 1949) as located in a 
HUD-designated difficult development area. Second, the 
provision reduces the eligible basis for difficult to develop 
areas and qualified census tracts from 130 percent to 125 
percent.\1194\
---------------------------------------------------------------------------
    \1194\A correction to the language is needed to conform to the 
intent that the change be limited to buildings eligible for the 70 
percent credit only.
---------------------------------------------------------------------------
      Effective date.--The provisions generally apply to 
buildings placed in service after the date of enactment. The 
changes related to the treatment of a veterans preference as 
not violating general public use requirements applies to 
buildings placed in service before, on, or after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the Senate 
amendment provisions.

                          EXEMPT ORGANIZATIONS

                    A. Unrelated Business Income Tax

1. Clarification of unrelated business income tax treatment of entities 
        exempt from tax under section 501(a) (sec. 5001 of the House 
        bill and sec. 511 of the Code)

                              PRESENT LAW

Tax exemption for certain organizations
      Section 501(a) exempts certain organizations from Federal 
income tax. Such organizations include: (1) tax-exempt 
organizations described in section 501(c) (including among 
others section 501(c)(3) charitable organizations and section 
501(c)(4) social welfare organizations); (2) religious and 
apostolic organizations described in section 501(d); and (3) 
trusts forming part of a pension, profit-sharing, or stock 
bonus plan of an employer described in section 401(a).
      Section 115 excludes from gross income certain income of 
entities that perform an essential government function. The 
exemption applies to: (1) income derived from any public 
utility or the exercise of any essential governmental function 
and accruing to a State or any political subdivision thereof, 
or the District of Columbia; or (2) income accruing to the 
government of any possession of the United States, or any 
political subdivision thereof.
Unrelated business income tax, in general
      An exempt organization generally may have revenue from 
four sources: contributions, gifts, and grants; trade or 
business income that is related to exempt activities (e.g., 
program service revenue); investment income; and trade or 
business income that is not related to exempt activities. The 
Federal income tax exemption generally extends to the first 
three categories, and does not extend to an organization's 
unrelated trade or business income. In some cases, however, the 
investment income of an organization is taxed as if it were 
unrelated trade or business income.\1195\
---------------------------------------------------------------------------
    \1195\This is the case for social clubs (sec. 501(c)(7)), voluntary 
employees' beneficiary associations (sec. 501(c)(9)), and organizations 
and trusts described in sections 501(c)(17) and 501(c)(20). Sec. 
512(a)(3).
---------------------------------------------------------------------------
      The unrelated business income tax (``UBIT'') generally 
applies to income derived from a trade or business regularly 
carried on by the organization that is not substantially 
related to the performance of the organization's tax-exempt 
functions.\1196\ An organization that is subject to UBIT and 
that has $1,000 or more of gross unrelated business taxable 
income must report that income on Form 990-T (Exempt 
Organization Business Income Tax Return).
---------------------------------------------------------------------------
    \1196\Secs. 511-514.
---------------------------------------------------------------------------
      Most exempt organizations may operate an unrelated trade 
or business so long as the organization remains primarily 
engaged in activities that further its exempt purposes. 
Therefore, an organization may engage in a substantial amount 
of unrelated business activity without jeopardizing exempt 
status. A section 501(c)(3) (charitable) organization, however, 
may not operate an unrelated trade or business as a substantial 
part of its activities.\1197\ Therefore, the unrelated trade or 
business activity of a section 501(c)(3) organization must be 
insubstantial.
---------------------------------------------------------------------------
    \1197\Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
Organizations subject to tax on unrelated business income
      Most exempt organizations are subject to the tax on 
unrelated business income. Specifically, organizations subject 
to the unrelated business income tax generally include: (1) 
organizations exempt from tax under section 501(a), including 
organizations described in section 501(c) (except for U.S. 
instrumentalities and certain charitable trusts);\1198\ (2) 
qualified pension, profit-sharing, and stock bonus plans 
described in section 401(a);\1199\ and (3) certain State 
colleges and universities.\1200\
---------------------------------------------------------------------------
    \1198\Sec. 511(a)(2)(A).
    \1199\Sec. 511(a)(2)(A).
    \1200\Sec. 511(a)(2)(B).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision clarifies that an organization does not 
fail to be subject to tax on its unrelated business income as 
an organization exempt from tax under section 501(a) solely 
because the organization also is exempt, or excludes amounts 
from gross income, by reason of another provision of the Code. 
For example, if an organization is described in section 401(a) 
(and thus is exempt from tax under section 501(a)) and its 
income also is described in section 115 (relating to the 
exclusion from gross income of certain income derived from the 
exercise of an essential governmental function), its status 
under section 115 does not cause it to be exempt from tax on 
its unrelated business income.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
2. Exclusion of research income from unrelated business taxable income 
        limited to publicly available research (sec. 5002 of the House 
        bill and sec. 512(b)(9) of the Code)

                              PRESENT LAW

Tax exemption for certain organizations
      Section 501(a) exempts certain organizations from Federal 
income tax. Such organizations include: (1) tax-exempt 
organizations described in section 501(c) (including among 
others section 501(c)(3) charitable organizations and section 
501(c)(4) social welfare organizations); (2) religious and 
apostolic organizations described in section 501(d); and (3) 
trusts forming part of a pension, profit-sharing, or stock 
bonus plan of an employer described in section 401(a).
Unrelated business income tax, in general
      The unrelated business income tax (``UBIT'') generally 
applies to income derived from a trade or business regularly 
carried on by the organization that is not substantially 
related to the performance of the organization's tax-exempt 
functions.\1201\ An organization that is subject to UBIT and 
that has $1,000 or more of gross unrelated business taxable 
income must report that income on Form 990-T (Exempt 
Organization Business Income Tax Return).
---------------------------------------------------------------------------
    \1201\Secs. 511-514.
---------------------------------------------------------------------------
      Most exempt organizations may operate an unrelated trade 
or business so long as the organization remains primarily 
engaged in activities that further its exempt purposes. 
Therefore, an organization may engage in a substantial amount 
of unrelated business activity without jeopardizing exempt 
status. A section 501(c)(3) (charitable) organization, however, 
may not operate an unrelated trade or business as a substantial 
part of its activities.\1202\ Therefore, the unrelated trade or 
business activity of a section 501(c)(3) organization must be 
insubstantial.
---------------------------------------------------------------------------
    \1202\Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
Organizations subject to tax on unrelated business income
      Most exempt organizations are subject to the tax on 
unrelated business income. Specifically, organizations subject 
to the unrelated business income tax generally include: (1) 
organizations exempt from tax under section 501(a), including 
organizations described in section 501(c) (except for U.S. 
instrumentalities and certain charitable trusts);\1203\ (2) 
qualified pension, profit-sharing, and stock bonus plans 
described in section 401(a);\1204\ and (3) certain State 
colleges and universities.\1205\
---------------------------------------------------------------------------
    \1203\Sec. 511(a)(2)(A).
    \1204\Sec. 511(a)(2)(A).
    \1205\Sec. 511(a)(2)(B).
---------------------------------------------------------------------------
Exclusions from unrelated business taxable income
            In general
      Certain types of income are specifically exempt from 
unrelated business taxable income, such as dividends, interest, 
royalties, and certain rents,\1206\ unless derived from debt-
financed property or from certain 50-percent controlled 
subsidiaries.\1207\ Other exemptions from UBIT are provided for 
activities in which substantially all the work is performed by 
volunteers, for income from the sale of donated goods, and for 
certain activities carried on for the convenience of members, 
students, patients, officers, or employees of a charitable 
organization. In addition, special UBIT provisions exempt from 
tax activities of trade shows and State fairs, income from 
bingo games, and income from the distribution of low-cost items 
incidental to the solicitation of charitable contributions. 
Organizations liable for tax on unrelated business taxable 
income may be liable for alternative minimum tax determined 
after taking into account adjustments and tax preference items.
---------------------------------------------------------------------------
    \1206\Secs. 511-514.
    \1207\Sec. 512(b)(13).
---------------------------------------------------------------------------
            Research income
      Certain income derived from research activities of exempt 
organizations is excluded from unrelated business taxable 
income. For example, income derived from research performed for 
the United States, a State, and certain agencies and 
subdivisions is excluded.\1208\ Income from research performed 
by a college, university, or hospital for any person also is 
excluded.\1209\ Finally, if an organization is operated 
primarily for purposes of carrying on fundamental research the 
results of which are freely available to the general public, 
all income derived by research performed by such organization 
for any person, not just income derived from research available 
to the general public, is excluded.\1210\
---------------------------------------------------------------------------
    \1208\Sec. 512(b)(7).
    \1209\Sec. 512(b)(8).
    \1210\Sec. 512(b)(9).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision modifies the exclusion of income from 
research performed by an organization operated primarily for 
purposes of carrying on fundamental research the results of 
which are freely available to the general public (section 
512(b)(9)). Under the provision, the organization may exclude 
from unrelated business taxable income under section 512(b)(9) 
only income from such fundamental research the results of which 
are freely available to the general public.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
3. Unrelated business taxable income separately computed for each trade 
        or business activity (sec. 13703 of the Senate amendment and 
        sec. 512(a) of the Code)

                              PRESENT LAW

Tax exemption for certain organizations
      Section 501(a) exempts certain organizations from Federal 
income tax. Such organizations include: (1) tax-exempt 
organizations described in section 501(c) (including among 
others section 501(c)(3) charitable organizations and section 
501(c)(4) social welfare organizations); (2) religious and 
apostolic organizations described in section 501(d); and (3) 
trusts forming part of a pension, profit-sharing, or stock 
bonus plan of an employer described in section 401(a).
Unrelated business income tax, in general
      An exempt organization generally may have revenue from 
four sources: contributions, gifts, and grants; trade or 
business income that is related to exempt activities (e.g., 
program service revenue); investment income; and trade or 
business income that is not related to exempt activities. The 
Federal income tax exemption generally extends to the first 
three categories, and does not extend to an organization's 
unrelated trade or business income. In some cases, however, the 
investment income of an organization is taxed as if it were 
unrelated trade or business income.\1211\
---------------------------------------------------------------------------
    \1211\This is the case for social clubs (sec. 501(c)(7)), voluntary 
employees' beneficiary associations (sec. 501(c)(9)), and organizations 
and trusts described in sections 501(c)(17) and 501(c)(20). Sec. 
512(a)(3).
---------------------------------------------------------------------------
      The unrelated business income tax (``UBIT'') generally 
applies to income derived from a trade or business regularly 
carried on by the organization that is not substantially 
related to the performance of the organization's tax-exempt 
functions.\1212\ An organization that is subject to UBIT and 
that has $1,000 or more of gross unrelated business taxable 
income must report that income on Form 990-T (Exempt 
Organization Business Income Tax Return).
---------------------------------------------------------------------------
    \1212\Secs. 511-514.
---------------------------------------------------------------------------
      Most exempt organizations may operate an unrelated trade 
or business so long as the organization remains primarily 
engaged in activities that further its exempt purposes. 
Therefore, an organization may engage in a substantial amount 
of unrelated business activity without jeopardizing exempt 
status. A section 501(c)(3) (charitable) organization, however, 
may not operate an unrelated trade or business as a substantial 
part of its activities.\1213\ Therefore, the unrelated trade or 
business activity of a section 501(c)(3) organization must be 
insubstantial.
---------------------------------------------------------------------------
    \1213\Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
Organizations subject to tax on unrelated business income
      Most exempt organizations are subject to the tax on 
unrelated business income. Specifically, organizations subject 
to the unrelated business income tax generally include: (1) 
organizations exempt from tax under section 501(a), including 
organizations described in section 501(c) (except for U.S. 
instrumentalities and certain charitable trusts);\1214\ (2) 
qualified pension, profit-sharing, and stock bonus plans 
described in section 401(a);\1215\ and (3) certain State 
colleges and universities.\1216\
---------------------------------------------------------------------------
    \1214\Sec. 511(a)(2)(A).
    \1215\Sec. 511(a)(2)(A).
    \1216\Sec. 511(a)(2)(B).
---------------------------------------------------------------------------
Exclusions from Unrelated Business Taxable Income
      Certain types of income are specifically exempt from 
unrelated business taxable income, such as dividends, interest, 
royalties, and certain rents,\1217\ unless derived from debt-
financed property or from certain 50-percent controlled 
subsidiaries.\1218\ Other exemptions from UBIT are provided for 
activities in which substantially all the work is performed by 
volunteers, for income from the sale of donated goods, and for 
certain activities carried on for the convenience of members, 
students, patients, officers, or employees of a charitable 
organization. In addition, special UBIT provisions exempt from 
tax activities of trade shows and State fairs, income from 
bingo games, and income from the distribution of low-cost items 
incidental to the solicitation of charitable contributions. 
Organizations liable for tax on unrelated business taxable 
income may be liable for alternative minimum tax determined 
after taking into account adjustments and tax preference items.
---------------------------------------------------------------------------
    \1217\Secs. 511-514.
    \1218\Sec. 512(b)(13).
---------------------------------------------------------------------------
Specific deduction against unrelated business taxable income
      In computing unrelated business taxable income, an exempt 
organization may take a specific deduction of $1,000. This 
specific deduction may not be used to create a net operating 
loss that will be carried back or forward to another 
year.\1219\
---------------------------------------------------------------------------
    \1219\Sec. 512(b)(12).
---------------------------------------------------------------------------
      In the case of a diocese, province or religious order, or 
a convention or association of churches, a specific deduction 
is allowed with respect to each parish, individual church, 
district, or other local unit. The specific deduction is equal 
to the lower of $1,000 or the gross income derived from any 
unrelated trade or business regularly carried on by the local 
unit.\1220\
---------------------------------------------------------------------------
    \1220\Ibid.
---------------------------------------------------------------------------
Operation of multiple unrelated trades or businesses
      An organization determines its unrelated business taxable 
income by subtracting from its gross unrelated business income 
deductions directly connected with the unrelated trade or 
business.\1221\ Under regulations, in determining unrelated 
business taxable income, an organization that operates multiple 
unrelated trades or businesses aggregates income from all such 
activities and subtracts from the aggregate gross income the 
aggregate of deductions.\1222\ As a result, an organization may 
use a deduction from one unrelated trade or business to offset 
income from another, thereby reducing total unrelated business 
taxable income.
---------------------------------------------------------------------------
    \1221\Sec. 512(a).
    \1222\Treas. Reg. sec. 1.512(a)-1(a).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      For an organization with more than one unrelated trade or 
business, the provision requires that unrelated business 
taxable income first be computed separately with respect to 
each trade or business and without regard to the specific 
deduction generally allowed under section 512(b)(12). The 
organization's unrelated business taxable income for a taxable 
year is the sum of the amounts (not less than zero) computed 
for each separate unrelated trade or business, less the 
specific deduction allowed under section 512(b)(12). A net 
operating loss deduction is allowed only with respect to a 
trade or business from which the loss arose.
      The result of the provision is that a deduction from one 
trade or business for a taxable year may not be used to offset 
income from a different unrelated trade or business for the 
same taxable year. The provision generally does not, however, 
prevent an organization from using a deduction from one taxable 
year to offset income from the same unrelated trade or business 
activity in another taxable year, where appropriate.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017. Under a special 
transition rule, net operating losses arising in a taxable year 
beginning before January 1, 2018, that are carried forward to a 
taxable year beginning on or after such date are not subject to 
the rule of the provision.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

                            B. Excise Taxes

1. Simplification of excise tax on private foundation investment income 
        (sec. 5101 of the House bill and sec. 4940 of the Code)

                              PRESENT LAW

Excise tax on the net investment income of private foundations
      Under section 4940(a), private foundations that are 
recognized as exempt from Federal income tax under section 
501(a) (other than exempt operating foundations\1223\) are 
subject to a two-percent excise tax on their net investment 
income. Net investment income generally includes interest, 
dividends, rents, royalties (and income from similar sources), 
and capital gain net income, and is reduced by expenses 
incurred to earn this income. The two-percent rate of tax is 
reduced to one-percent in any year in which a foundation 
exceeds the average historical level of its charitable 
distributions. Specifically, the excise tax rate is reduced if 
the foundation's qualifying distributions (generally, amounts 
paid to accomplish exempt purposes)\1224\ equal or exceed the 
sum of (1) the amount of the foundation's assets for the 
taxable year multiplied by the average percentage of the 
foundation's qualifying distributions over the five taxable 
years immediately preceding the taxable year in question, and 
(2) one percent of the net investment income of the foundation 
for the taxable year.\1225\ In addition, the foundation cannot 
have been subject to tax in any of the five preceding years for 
failure to meet minimum qualifying distribution requirements in 
section 4942.
---------------------------------------------------------------------------
    \1223\Sec. 4940(d)(1). Exempt operating foundations generally 
include organizations such as museums or libraries that devote their 
assets to operating charitable programs but have difficulty meeting the 
``public support'' tests necessary not to be classified as a private 
foundation. To be an exempt operating foundation, an organization must: 
(1) be an operating foundation (as defined in section 4942(j)(3)); (2) 
be publicly supported for at least 10 taxable years; (3) have a 
governing body no more than 25 percent of whom are disqualified persons 
and that is broadly representative of the general public; and (4) have 
no officers who are disqualified persons. Sec. 4940(d)(2).
    \1224\Sec. 4942(g).
    \1225\Sec. 4940(e).
---------------------------------------------------------------------------
      Private foundations that are not exempt from tax under 
section 501(a), such as certain charitable trusts, are subject 
to an excise tax under section 4940(b). The tax is equal to the 
excess of the sum of the excise tax that would have been 
imposed under section 4940(a) if the foundation were tax exempt 
and the amount of the tax on unrelated business income that 
would have been imposed if the foundation were tax exempt, over 
the income tax imposed on the foundation under subtitle A of 
the Code.
      Private foundations are required to make a minimum amount 
of qualifying distributions each year to avoid tax under 
section 4942. The minimum amount of qualifying distributions a 
foundation has to make to avoid tax under section 4942 is 
reduced by the amount of section 4940 excise taxes paid.\1226\
---------------------------------------------------------------------------
    \1226\Sec. 4942(d)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision replaces the two rates of excise tax on 
tax-exempt private foundations with a single rate of tax of 1.4 
percent. Thus, under the provision, a tax-exempt private 
foundation generally is subject to an excise tax of 1.4 percent 
on its net investment income. A taxable private foundation is 
subject to an excise tax equal to the excess (if any) of the 
sum of the 1.4-percent net investment income excise tax and the 
amount of the tax on unrelated business income (both calculated 
as if the foundation were tax-exempt), over the income tax 
imposed on the foundation. The provision repeals the special 
reduced excise tax rate for private foundations that exceed 
their historical level of qualifying distributions.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
2. Private operating foundation requirements relating to operation of 
        an art museum (sec. 5102 of the House bill and sec. 4942(j) of 
        the Code)

                              PRESENT LAW

Public charities and private foundations
      An organization qualifying for tax-exempt status under 
section 501(c)(3) is further classified as either a public 
charity or a private foundation. An organization may qualify as 
a public charity in several ways.\1227\ Certain organizations 
are classified as public charities per se, regardless of their 
sources of support. These include churches, certain schools, 
hospitals and other medical organizations, certain 
organizations providing assistance to colleges and 
universities, and governmental units.\1228\ Other organizations 
qualify as public charities because they are broadly publicly 
supported. First, a charity may qualify as publicly supported 
if at least one-third of its total support is from gifts, 
grants, or other contributions from governmental units or the 
general public.\1229\ Alternatively, it may qualify as publicly 
supported if it receives more than one-third of its total 
support from a combination of gifts, grants, and contributions 
from governmental units and the public plus revenue arising 
from activities related to its exempt purposes (e.g., fee for 
service income). In addition, this category of public charity 
must not rely excessively on endowment income as a source of 
support.\1230\ A supporting organization, i.e., an organization 
that provides support to another section 501(c)(3) entity that 
is not a private foundation and meets certain other 
requirements of the Code, also is classified as a public 
charity.\1231\
---------------------------------------------------------------------------
    \1227\The Code does not expressly define the term ``public 
charity,'' but rather provides exceptions to those entities that are 
treated as private foundations.
    \1228\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through 
(iv) for a description of these organizations).
    \1229\Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical 
test, the organization may qualify as a public charity if it passes a 
``facts and circumstances'' test. Treas. Reg. sec. 1.170A-9(f)(3).
    \1230\To meet this requirement, the organization must normally 
receive more than one-third of its support from a combination of (1) 
gifts, grants, contributions, or membership fees and (2) certain gross 
receipts from admissions, sales of merchandise, performance of 
services, and furnishing of facilities in connection with activities 
that are related to the organization's exempt purposes. Sec. 
509(a)(2)(A). In addition, the organization must not normally receive 
more than one-third of its public support in each taxable year from the 
sum of (1) gross investment income and (2) the excess of unrelated 
business taxable income as determined under section 512 over the amount 
of unrelated business income tax imposed by section 511. Sec. 
509(a)(2)(B).
    \1231\Sec. 509(a)(3). Supporting organizations are further 
classified as Type I, II, or III depending on the relationship they 
have with the organizations they support. Supporting organizations must 
support public charities listed in one of the other categories (i.e., 
per se public charities, broadly supported public charities, or revenue 
generating public charities), and they are not permitted to support 
other supporting organizations or testing for public safety 
organizations.
    Organizations organized and operated exclusively for testing for 
public safety also are classified as public charities. Sec. 509(a)(4). 
Such organizations, however, are not eligible to receive deductible 
charitable contributions under section 170.
---------------------------------------------------------------------------
      A section 501(c)(3) organization that does not fit within 
any of the above categories is a private foundation. In 
general, private foundations receive funding from a limited 
number of sources (e.g., an individual, a family, or a 
corporation).
      The deduction for charitable contributions to private 
foundations is in some instances less generous than the 
deduction for charitable contributions to public charities. In 
addition, private foundations are subject to a number of 
operational rules and restrictions that do not apply to public 
charities.\1232\
---------------------------------------------------------------------------
    \1232\Unlike public charities, private foundations are subject to 
tax on their net investment income at a rate of two percent (one 
percent in some cases). Sec. 4940. Private foundations also are subject 
to more restrictions on their activities than are public charities. For 
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount 
of charitable distributions each year, (sec. 4942), are limited in the 
extent to which they may control a business (sec. 4943), may not make 
speculative investments (sec. 4944), and may not make certain 
expenditures (sec. 4945). Violations of these rules result in excise 
taxes on the foundation and, in some cases, may result in excise taxes 
on the managers of the foundation.
---------------------------------------------------------------------------
Tax on failure to distribute income by private nonoperating foundations
      Private nonoperating foundations are required to pay out 
a minimum amount each year as qualifying distributions.\1233\ 
In general, a qualifying distribution is an amount paid to 
accomplish one or more of the organization's exempt purposes, 
including reasonable and necessary administrative 
expenses.\1234\ Failure to pay out the minimum required amount 
results in an initial excise tax on the foundation of 30 
percent of the undistributed amount. An additional tax of 100 
percent of the undistributed amount applies if an initial tax 
is imposed and the required distributions have not been made by 
the end of the applicable taxable period.\1235\ A foundation 
may include as a qualifying distribution the salaries, 
occupancy expenses, travel costs, and other reasonable and 
necessary administrative expenses that the foundation incurs in 
operating a grant program. A qualifying distribution also 
includes any amount paid to acquire an asset used (or held for 
use) directly in carrying out one or more of the organization's 
exempt purposes and certain amounts set aside for exempt 
purposes.\1236\
---------------------------------------------------------------------------
    \1233\Sec. 4942.
    \1234\Sec. 4942(g)(1)(A).
    \1235\Sec. 4942(a) and (b). Taxes imposed may be abated if certain 
conditions are met. Secs. 4961 and 4962.
    \1236\Sec. 4942(g)(1)(B) and 4942(g)(2). In general, an 
organization is permitted to adjust the distributable amount in those 
cases where distributions during the five preceding years have exceeded 
the payout requirements. Sec. 4942(i).
---------------------------------------------------------------------------
Private operating foundations
      The tax on failure to distribute income does not apply to 
the undistributed income of a private foundation for any 
taxable year for which it is an operating foundation.\1237\ 
Private operating foundations generally operate their own 
charitable programs directly, rather than serving primarily as 
a grantmaking entity.
---------------------------------------------------------------------------
    \1237\Sec. 4942(a)(1).
---------------------------------------------------------------------------
      Private operating foundations must satisfy several tests 
designed to distinguish them from nonoperating (grantmaking) 
foundations. First, an operating foundation generally must make 
qualifying distributions for the direct conduct of activities 
that are related to its exempt purpose (as opposed to making 
such distributions in the form of grants to other charities) 
equal to 85 percent of the lesser of its adjusted net income or 
its minimum investment return, each as defined under section 
4942.\1238\ In addition, an operating foundation must satisfy 
one of the following three alternative tests: (1) an asset 
test, under which substantially more than half of the 
organization's assets (generally, 65 percent) are devoted to 
the direct conduct of exempt activities or to functionally 
related businesses; (2) an endowment test, under which the 
organization normally makes qualifying distributions for the 
direct conduct of activities related to its exempt purpose in 
an amount not less than two-thirds of its minimum investment 
return; or (3) a support test, under which the organization 
must meet certain measures to show that it receives public 
support.\1239\
---------------------------------------------------------------------------
    \1238\Sec. 4942(j)(3)(A); Treas. Reg. sec. 53.4942(b)-1(c).
    \1239\Sec. 4942(j)(3)(B).
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the provision, an organization that operates an art 
museum as a substantial activity does not qualify as a private 
operating foundation unless the museum is open during normal 
business hours to the public for at least 1,000 hours during 
the taxable year.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
3. Excise tax based on investment income of private colleges and 
        universities (sec. 5103 of the House bill, sec. 13701 of the 
        Senate amendment, and new sec. 4968 of the Code)

                              PRESENT LAW

Public charities and private foundations
      An organization qualifying for tax-exempt status under 
section 501(c)(3) is further classified as either a public 
charity or a private foundation. An organization may qualify as 
a public charity in several ways.\1240\ Certain organizations 
are classified as public charities per se, regardless of their 
sources of support. These include churches, certain schools, 
hospitals and other medical organizations, certain 
organizations providing assistance to colleges and 
universities, and governmental units.\1241\ Other organizations 
qualify as public charities because they are broadly publicly 
supported. First, a charity may qualify as publicly supported 
if at least one-third of its total support is from gifts, 
grants or other contributions from governmental units or the 
general public.\1242\ Alternatively, it may qualify as publicly 
supported if it receives more than one-third of its total 
support from a combination of gifts, grants, and contributions 
from governmental units and the public plus revenue arising 
from activities related to its exempt purposes (e.g., fee for 
service income). In addition, this category of public charity 
must not rely excessively on endowment income as a source of 
support.\1243\ A supporting organization, i.e., an organization 
that provides support to another section 501(c)(3) entity that 
is not a private foundation and meets the requirements of the 
Code, also is classified as a public charity.\1244\
---------------------------------------------------------------------------
    \1240\The Code does not expressly define the term ``public 
charity,'' but rather provides exceptions to those entities that are 
treated as private foundations.
    \1241\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through 
(iv) for a description of these organizations).
    \1242\Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical 
test, the organization may qualify as a public charity if it passes a 
``facts and circumstances'' test. Treas. Reg. sec. 1.170A-9(f)(3).
    \1243\To meet this requirement, the organization must normally 
receive more than one-third of its support from a combination of (1) 
gifts, grants, contributions, or membership fees and (2) certain gross 
receipts from admissions, sales of merchandise, performance of 
services, and furnishing of facilities in connection with activities 
that are related to the organization's exempt purposes. Sec. 
509(a)(2)(A). In addition, the organization must not normally receive 
more than one-third of its public support in each taxable year from the 
sum of (1) gross investment income and (2) the excess of unrelated 
business taxable income as determined under section 512 over the amount 
of unrelated business income tax imposed by section 511. Sec. 
509(a)(2)(B).
    \1244\Sec. 509(a)(3). Supporting organizations are further 
classified as Type I, II, or III depending on the relationship they 
have with the organizations they support. Supporting organizations must 
support public charities listed in one of the other categories (i.e., 
per se public charities, broadly supported public charities, or revenue 
generating public charities), and they are not permitted to support 
other supporting organizations or testing for public safety 
organizations.
    Organizations organized and operated exclusively for testing for 
public safety also are classified as public charities. Sec. 509(a)(4). 
Such organizations, however, are not eligible to receive deductible 
charitable contributions under section 170.
---------------------------------------------------------------------------
      A section 501(c)(3) organization that does not fit within 
any of the above categories is a private foundation. In 
general, private foundations receive funding from a limited 
number of sources (e.g., an individual, a family, or a 
corporation).
      The deduction for charitable contributions to private 
foundations is in some instances less generous than the 
deduction for charitable contributions to public charities. In 
addition, private foundations are subject to a number of 
operational rules and restrictions that do not apply to public 
charities.\1245\
---------------------------------------------------------------------------
    \1245\Unlike public charities, private foundations are subject to 
tax on their net investment income at a rate of two percent (one 
percent in some cases). Sec. 4940. Private foundations also are subject 
to more restrictions on their activities than are public charities. For 
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount 
of charitable distributions each year, (sec. 4942), are limited in the 
extent to which they may control a business (sec. 4943), may not make 
speculative investments (sec. 4944), and may not make certain 
expenditures (sec. 4945). Violations of these rules result in excise 
taxes on the foundation and, in some cases, may result in excise taxes 
on the managers of the foundation.
---------------------------------------------------------------------------
Excise tax on investment income of private foundations
      Under section 4940(a), private foundations that are 
recognized as exempt from Federal income tax under section 
501(a) (other than exempt operating foundations)\1246\ are 
subject to a two-percent excise tax on their net investment 
income. Net investment income generally includes interest, 
dividends, rents, royalties (and income from similar sources), 
and capital gain net income, and is reduced by expenses 
incurred to earn this income. The two-percent rate of tax is 
reduced to one-percent in any year in which a foundation 
exceeds the average historical level of its charitable 
distributions. Specifically, the excise tax rate is reduced if 
the foundation's qualifying distributions (generally, amounts 
paid to accomplish exempt purposes)\1247\ equal or exceed the 
sum of (1) the amount of the foundation's assets for the 
taxable year multiplied by the average percentage of the 
foundation's qualifying distributions over the five taxable 
years immediately preceding the taxable year in question, and 
(2) one percent of the net investment income of the foundation 
for the taxable year.\1248\ In addition, the foundation cannot 
have been subject to tax in any of the five preceding years for 
failure to meet minimum qualifying distribution requirements in 
section 4942.
---------------------------------------------------------------------------
    \1246\Exempt operating foundations are exempt from the section 4940 
tax. Sec. 4940(d)(1). Exempt operating foundations generally include 
organizations such as museums or libraries that devote their assets to 
operating charitable programs but have difficulty meeting the ``public 
support'' tests necessary not to be classified as a private foundation. 
To be an exempt operating foundation, an organization must: (1) be an 
operating foundation (as defined in section 4942(j)(3)); (2) be 
publicly supported for at least 10 taxable years; (3) have a governing 
body no more than 25 percent of whom are disqualified persons and that 
is broadly representative of the general public; and (4) have no 
officers who are disqualified persons. Sec. 4940(d)(2).
    \1247\Sec. 4942(g).
    \1248\Sec. 4940(e).
---------------------------------------------------------------------------
      Private foundations that are not exempt from tax under 
section 501(a), such as certain charitable trusts, are subject 
to an excise tax under section 4940(b). The tax is equal to the 
excess of the sum of the excise tax that would have been 
imposed under section 4940(a) if the foundation were tax exempt 
and the amount of the tax on unrelated business income that 
would have been imposed if the foundation were tax exempt, over 
the income tax imposed on the foundation under subtitle A of 
the Code.
      Private foundations are required to make a minimum amount 
of qualifying distributions each year to avoid tax under 
section 4942. The minimum amount of qualifying distributions a 
foundation has to make to avoid tax under section 4942 is 
reduced by the amount of section 4940 excise taxes paid.\1249\
---------------------------------------------------------------------------
    \1249\Sec. 4942(d)(2).
---------------------------------------------------------------------------
Private colleges and universities
      Private colleges and universities generally are treated 
as public charities rather than private foundations\1250\ and 
thus are not subject to the private foundation excise tax on 
net investment income.
---------------------------------------------------------------------------
    \1250\Secs. 509(a)(1) and 170(b)(1)(A)(ii).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision imposes an excise tax on an applicable 
educational institution for each taxable year equal to 1.4 
percent of the net investment income of the institution for the 
taxable year. Net investment income is determined using rules 
similar to the rules of section 4940(c) (relating to the net 
investment income of a private foundation).
      For purposes of the provision, an applicable educational 
institution is an institution: (1) that has at least 500 
students during the preceding taxable year; (2) that is an 
eligible education institution as described in section 25A of 
the Code;\1251\ (3) that is not described in the first section 
of section 511(a)(2)(B) of the Code (generally describing State 
colleges and universities); and (4) the aggregate fair market 
value of the assets of which at the end of the preceding 
taxable year (other than those assets that are used directly in 
carrying out the institution's exempt purpose\1252\) is at 
least $250,000 per student. For these purposes, the number of 
students of an institution is based on the daily average number 
of full-time students attending the institution, with part-time 
students being taken into account on a full-time student 
equivalent basis.
---------------------------------------------------------------------------
    \1251\Section 25A defines an eligible educational institution as an 
institution (1) which is described in section 481 of the Higher 
Education Act of 1965 (20 U.S.C. sec. 1088), as in effect on August 5, 
1977, and (2) which is eligible to participate in a program under title 
IV of such Act.
    \1252\Assets used directly in carrying out the institution's exempt 
purpose include, for example, classroom buildings and physical 
facilities used for educational activities and office equipment or 
other administrative assets used by employees of the institution in 
carrying out exempt activities, among other assets.
---------------------------------------------------------------------------
      For purposes of determining whether an institution meets 
the asset-per-student threshold and determining net investment 
income, assets and net investment income include amounts with 
respect to an organization that is related to the institution. 
An organization is treated as related to the institution for 
this purpose if the organization: (1) controls, or is 
controlled by, the institution; (2) is controlled by one or 
more persons that control the institution; or (3) is a 
supported organization\1253\ or a supporting organization\1254\ 
during the taxable year with respect to the institution.
---------------------------------------------------------------------------
    \1253\Secs. 509(f)(3).
    \1254\Secs. 509(a)(3).
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill with the 
following modifications. First, the definition of applicable 
educational institution is modified in two ways: (1) it 
requires that the educational institution have at least 500 
tuition paying students; and (2) it increases the asset-per-
student threshold from $250,000 to $500,000.
      Second, the Senate amendment clarifies the operation of 
the related-party rules of the provision. For purposes of 
determining whether an educational institution meets the asset-
per-student threshold and for purposes of determining net 
investment income, assets and net investment income of a 
related organization with respect to the educational 
institution are treated as assets and net investment income, 
respectively, of the educational institution, except that:
            1. No such amount is taken into account with 
        respect to more than one educational institution; and
            2. Unless the related organization is controlled by 
        the educational institution or is a supporting 
        organization (described in section 509(a)(3)) with 
        respect to the institution for the taxable year, assets 
        and investment income that are not intended or 
        available for the use or benefit of the educational 
        institution are not taken into account. For example, 
        assets of a related organization that are earmarked or 
        restricted for (or fairly attributable to) the 
        educational institution would be treated as assets of 
        the educational institution, whereas assets of a 
        related organization that are held for unrelated 
        purposes (and are not fairly attributable to the 
        educational institution) would be disregarded.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with the following modification. The provision modifies the 
definition of ``applicable educational institution'' to include 
only institutions more than 50 percent of the tuition paying 
students of which are located in the United States. For this 
purpose, the number of students at a location is based on the 
daily average number of full-time students attending the 
institution, with part-time students being taken into account 
on a full-time student equivalent basis.
      It is intended that the Secretary promulgate regulations 
to carry out the intent of the provision, including regulations 
that describe: (1) assets that are used directly in carrying 
out the educational institution's exempt purpose; (2) the 
computation of net investment income; and (3) assets that are 
intended or available for the use or benefit of the educational 
institution.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.
4. Provide an exception to the private foundation excess business 
        holdings rules for philanthropic business holdings (sec. 5104 
        of the House bill and sec. 4943 of the Code)

                              PRESENT LAW

Public charities and private foundations
      An organization qualifying for tax-exempt status under 
section 501(c)(3) is further classified as either a public 
charity or a private foundation. An organization may qualify as 
a public charity in several ways.\1255\ Certain organizations 
are classified as public charities per se, regardless of their 
sources of support. These include churches, certain schools, 
hospitals and other medical organizations (including medical 
research organizations), certain organizations providing 
assistance to colleges and universities, and governmental 
units.\1256\ Other organizations qualify as public charities 
because they are broadly publicly supported. First, a charity 
may qualify as publicly supported if at least one-third of its 
total support is from gifts, grants, or other contributions 
from governmental units or the general public.\1257\ 
Alternatively, it may qualify as publicly supported if it 
receives more than one-third of its total support from a 
combination of gifts, grants, and contributions from 
governmental units and the public plus revenue arising from 
activities related to its exempt purposes (e.g., fee for 
service income). In addition, this category of public charity 
must not rely excessively on endowment income as a source of 
support.\1258\ A supporting organization, i.e., an organization 
that provides support to another section 501(c)(3) entity that 
is not a private foundation and meets certain other 
requirements of the Code, also is classified as a public 
charity.\1259\
---------------------------------------------------------------------------
    \1255\The Code does not expressly define the term ``public 
charity,'' but rather provides exceptions to those entities that are 
treated as private foundations.
    \1256\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through 
(iv) for a description of these organizations).
    \1257\Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical 
test, the organization may qualify as a public charity if it passes a 
``facts and circumstances'' test. Treas. Reg. sec. 1.170A-9(f)(3).
    \1258\To meet this requirement, the organization must normally 
receive more than one-third of its support from a combination of (1) 
gifts, grants, contributions, or membership fees and (2) certain gross 
receipts from admissions, sales of merchandise, performance of 
services, and furnishing of facilities in connection with activities 
that are related to the organization's exempt purposes. Sec. 
509(a)(2)(A). In addition, the organization must not normally receive 
more than one-third of its public support in each taxable year from the 
sum of (1) gross investment income and (2) the excess of unrelated 
business taxable income as determined under section 512 over the amount 
of unrelated business income tax imposed by section 511. Sec. 
509(a)(2)(B).
    \1259\Sec. 509(a)(3). Organizations organized and operated 
exclusively for testing for public safety also are classified as public 
charities. Sec. 509(a)(4). Such organizations, however, are not 
eligible to receive deductible charitable contributions under section 
170.
---------------------------------------------------------------------------
      A section 501(c)(3) organization that does not fit within 
any of the above categories is a private foundation. In 
general, private foundations receive funding from a limited 
number of sources (e.g., an individual, a family, or a 
corporation).
      The deduction for charitable contributions to private 
foundations is in some instances less generous than the 
deduction for charitable contributions to public charities. In 
addition, private foundations are subject to a number of 
operational rules and restrictions that do not apply to public 
charities, as well as a tax on their net investment 
income.\1260\
---------------------------------------------------------------------------
    \1260\Unlike public charities, private foundations are subject to 
tax on their net investment income at a rate of two percent (one 
percent in some cases). Sec. 4940. Private foundations also are subject 
to more restrictions on their activities than are public charities. For 
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount 
of charitable distributions each year (sec. 4942), are limited in the 
extent to which they may control a business (sec. 4943), may not make 
speculative investments (sec. 4944), and may not make certain 
expenditures (sec. 4945). Violations of these rules result in excise 
taxes on the foundation and, in some cases, may result in excise taxes 
on the managers of the foundation.
---------------------------------------------------------------------------
Excess business holdings of private foundations
      Private foundations are subject to tax on excess business 
holdings.\1261\ In general, a private foundation is permitted 
to hold 20 percent of the voting stock in a corporation, 
reduced by the amount of voting stock held by all disqualified 
persons (as defined in section 4946). If it is established that 
no disqualified person has effective control of the 
corporation, a private foundation and disqualified persons 
together may own up to 35 percent of the voting stock of a 
corporation. A private foundation shall not be treated as 
having excess business holdings in any corporation if it owns 
(together with certain other related private foundations) not 
more than two percent of the voting stock and not more than two 
percent in value of all outstanding shares of all classes of 
stock in that corporation. Similar rules apply with respect to 
holdings in a partnership (substituting ``profits interest'' 
for ``voting stock'' and ``capital interest'' for ``nonvoting 
stock'') and to other unincorporated enterprises (by 
substituting ``beneficial interest'' for ``voting stock''). 
Private foundations are not permitted to have holdings in a 
proprietorship. Foundations generally have a five-year period 
to dispose of excess business holdings (acquired other than by 
purchase) without being subject to tax.\1262\ This five-year 
period may be extended an additional five years in limited 
circumstances.\1263\ The excess business holdings rules do not 
apply to holdings in a functionally related business or to 
holdings in a trade or business at least 95 percent of the 
gross income of which is derived from passive sources.\1264\
---------------------------------------------------------------------------
    \1261\Sec. 4943. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \1262\Sec. 4943(c)(6).
    \1263\Sec. 4943(c)(7).
    \1264\Sec. 4943(d)(3).
---------------------------------------------------------------------------
      The initial tax is equal to five percent of the value of 
the excess business holdings held during the foundation's 
applicable taxable year. An additional tax is imposed if an 
initial tax is imposed and at the close of the applicable 
taxable period, the foundation continues to hold excess 
business holdings. The amount of the additional tax is equal to 
200 percent of such holdings.

                               HOUSE BILL

      The provision creates an exception to the excess business 
holdings rules for certain philanthropic business holdings. 
Specifically, the tax on excess business holdings does not 
apply with respect to the holdings of a private foundation in 
any business enterprise that, for the taxable year, satisfies 
the following requirements: (1) the ownership requirements; (2) 
the ``all profits to charity'' distribution requirement; and 
(3) the independent operation requirements.
      The ownership requirements are satisfied if: (1) all 
ownership interests in the business enterprise are held by the 
private foundation at all times during the taxable year; and 
(2) all the private foundation's ownership interests in the 
business enterprise were acquired not by purchase.
      The ``all profits to charity'' distribution requirement 
is satisfied if the business enterprise, not later than 120 
days after the close of the taxable year, distributes an amount 
equal to its net operating income for such taxable year to the 
private foundation. For this purpose, the net operating income 
of any business enterprise for any taxable year is an amount 
equal to the gross income of the business enterprise for the 
taxable year, reduced by the sum of: (1) the deductions allowed 
by chapter 1 of the Code for the taxable year that are directly 
connected with the production of the income; (2) the tax 
imposed by chapter 1 on the business enterprise for the taxable 
year; and (3) an amount for a reasonable reserve for working 
capital and other business needs of the business enterprise.
      The independent operation requirements are met if, at all 
times during the taxable year, the following three requirements 
are satisfied. First, no substantial contributor to the private 
foundation, or family member of such a contributor, is a 
director, officer, trustee, manager, employee, or contractor of 
the business enterprise (or an individual having powers or 
responsibilities similar to any of the foregoing). Second, at 
least a majority of the board of directors of the private 
foundation are not also directors or officers of the business 
enterprise or members of the family of a substantial 
contributor to the private foundation. Third, there is no loan 
outstanding from the business enterprise to a substantial 
contributor to the private foundation or a family member of 
such contributor. For purposes of the independent operation 
requirements, ``substantial contributor'' has the meaning given 
to the term under section 4958(c)(3)(C), and family members are 
determined under section 4958(f)(4).
      The provision does not apply to the following 
organizations: (1) donor advised funds or supporting 
organizations that are subject to the excess business holdings 
rules by reason of section 4943(e) or (f); (2) any trust 
described in section 4947(a)(1) (relating to charitable 
trusts); or (3) any trust described in section 4947(a)(2) 
(relating to split-interest trusts).
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.

           C. Requirements for Organizations Exempt From Tax

1. Section 501(c)(3) organizations permitted to make statements 
        relating to political campaign in ordinary course of activities 
        in carrying out exempt purpose (sec. 5201 of the House bill and 
        sec. 501 of the Code)

                              PRESENT LAW

Section 501(c)(3) organizations
      Charitable organizations, i.e., organizations described 
in section 501(c)(3), generally are exempt from Federal income 
tax and are eligible to receive tax deductible contributions. A 
charitable organization must operate primarily in pursuance of 
one or more tax-exempt purposes constituting the basis of its 
tax exemption.\1265\ The Code specifies such purposes as 
religious, charitable, scientific, testing for public safety, 
literary, or educational purposes, or to foster international 
amateur sports competition, or for the prevention of cruelty to 
children or animals.\1266\ In general, an organization is 
organized and operated for charitable purposes if it provides 
relief for the poor and distressed or the underprivileged. In 
order to qualify as operating primarily for a purpose described 
in section 501(c)(3), an organization must satisfy the 
following operational requirements: (1) its net earnings may 
not inure to the benefit of any person in a position to 
influence the activities of the organization; (2) it must 
operate to provide a public benefit, not a private 
benefit;\1267\ (3) it may not be operated primarily to conduct 
an unrelated trade or business;\1268\ (4) it may not engage in 
substantial legislative lobbying; and (5) it may not 
participate or intervene in any political campaign.
---------------------------------------------------------------------------
    \1265\Treas. Reg. sec. 1.501(c)(3)-1(c)(1).
    \1266\Treas. Reg. sec. 1.501(c)(3)-1(d)(2).
    \1267\Treas. Reg. sec. 1.501(c)(3)-1(d)(1)(ii).
    \1268\Treas. Reg. sec. 1.501(c)(3)-1(e)(1). Conducting a certain 
level of unrelated trade or business activity will not jeopardize tax-
exempt status.
---------------------------------------------------------------------------
      Section 501(c)(3) organizations are classified either as 
``public charities'' or ``private foundations.''\1269\ Private 
foundations generally are defined under section 509(a) as all 
organizations described in section 501(c)(3) other than an 
organization granted public charity status by reason of: (1) 
being a specified type of organization (i.e., churches, 
educational institutions, hospitals and certain other medical 
organizations, certain organizations providing assistance to 
colleges and universities, or a governmental unit); (2) 
receiving a substantial part of its support from governmental 
units or direct or indirect contributions from the general 
public; or (3) providing support to another section 501(c)(3) 
entity that is not a private foundation. In contrast to public 
charities, private foundations generally are funded from a 
limited number of sources (e.g., an individual, family, or 
corporation). Donors to private foundations and persons related 
to such donors together often control the operations of private 
foundations.
---------------------------------------------------------------------------
    \1269\Sec. 509(a).
---------------------------------------------------------------------------
      Because private foundations receive support from, and 
typically are controlled by, a small number of supporters, 
private foundations are subject to a number of anti-abuse rules 
and excise taxes not applicable to public charities.\1270\ 
Public charities also have certain advantages over private 
foundations regarding the deductibility of contributions.
---------------------------------------------------------------------------
    \1270\Secs. 4940-4945.
---------------------------------------------------------------------------
Political campaign activities
      Charitable organizations may not participate in, or 
intervene in (including the publishing or distributing of 
statements), any political campaign on behalf of (or in 
opposition to) any candidate for public office.\1271\ The 
prohibition on such political campaign activity is absolute 
and, in general, includes activities such as making 
contributions to a candidate's political campaign, endorsements 
of a candidate, lending employees to work in a political 
campaign, or providing facilities for use by a candidate. The 
absolute prohibition on campaign activities was added in 1954 
by the so called ``Johnson amendment.''\1272\ Many other 
activities may constitute political campaign activity, 
depending on the facts and circumstances. The sanction for a 
violation of the prohibition is loss of the organization's tax-
exempt status.
---------------------------------------------------------------------------
    \1271\Sec. 501(c)(3).
    \1272\Internal Revenue Code of 1954, sec. 501(c)(3), Pub. L. No. 
591 (August 16, 1954).
---------------------------------------------------------------------------
      For organizations that engage in prohibited political 
campaign activity, the Code provides three penalties that may 
be applied either as alternatives to revocation of tax 
exemption or in addition to loss of tax-exempt status: an 
excise tax on political expenditures,\1273\ termination 
assessment of all taxes due,\1274\ and an injunction against 
further political expenditures.\1275\
---------------------------------------------------------------------------
    \1273\Sec. 4955.
    \1274\Sec. 6852(a)(1).
    \1275\Sec. 7409.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision modifies the present-law rules relating to 
political campaign activity by section 501(c)(3) organizations 
for the following purposes: (1) section 501(c)(3) tax-exempt 
status; (2) qualifying as an eligible recipient of tax-
deductible contributions for income,\1276\ gift,\1277\ and 
estate tax\1278\ purposes; and (3) application of the excise 
tax on political expenditures by section 501(c)(3) 
organizations.\1279\
---------------------------------------------------------------------------
    \1276\Sec. 170(c)(2).
    \1277\Sec. 2522.
    \1278\Secs. 2055 and 2106.
    \1279\Sec. 4955.
---------------------------------------------------------------------------
      For such purposes, an organization shall not fail to be 
treated as organized and operated exclusively for a purpose 
described in section 501(c)(3), nor shall it be deemed to have 
participated in, or intervened in any political campaign on 
behalf of (or in opposition to) any candidate for public 
office, solely because of the content of any statement that: 
(A) is made in the ordinary course of the organization's 
regular and customary activities in carrying out its exempt 
purpose; and (B) results in the organization incurring not more 
than de minimis incremental expenses.
      The provision does not apply to taxable years beginning 
after December 31, 2023.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2018.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
2. Additional reporting requirements for donor advised fund sponsoring 
        organizations (sec. 5202 of the House bill and sec. 6033 of the 
        Code)

                              PRESENT LAW

Overview
      Some charitable organizations (including community 
foundations) establish accounts to which donors may contribute 
and thereafter provide nonbinding advice or recommendations 
with regard to distributions from the fund or the investment of 
assets in the fund. Such accounts are commonly referred to as 
``donor advised funds.'' Donors who make contributions to 
charities for maintenance in a donor advised fund generally 
claim a charitable contribution deduction at the time of the 
contribution.\1280\ Although sponsoring charities frequently 
permit donors (or other persons appointed by donors) to provide 
nonbinding recommendations concerning the distribution or 
investment of assets in a donor advised fund, sponsoring 
charities generally must have legal ownership and control of 
such assets following the contribution. If the sponsoring 
charity does not have such control (or permits a donor to 
exercise control over amounts contributed), the donor's 
contributions may not qualify for a charitable deduction, and, 
in the case of a community foundation, the contribution may be 
treated as being subject to a material restriction or condition 
by the donor.
---------------------------------------------------------------------------
    \1280\Contributions to a sponsoring organization for maintenance in 
a donor advised fund are not eligible for a charitable deduction for 
income tax purposes if the sponsoring organization is a veterans' 
organization described in section 170(c)(3), a fraternal society 
described in section 170(c)(4), or a cemetery company described in 
section 170(c)(5); for gift tax purposes if the sponsoring organization 
is a fraternal society described in section 2522(a)(3) or a veterans' 
organization described in section 2522(a)(4); or for estate tax 
purposes if the sponsoring organization is a fraternal society 
described in section 2055(a)(3) or a veterans' organization described 
in section 2055(a)(4). In addition, contributions to a sponsoring 
organization for maintenance in a donor advised fund are not eligible 
for a charitable deduction for income, gift, or estate tax purposes if 
the sponsoring organization is a Type III supporting organization 
(other than a functionally integrated Type III supporting 
organization). In addition to satisfying generally applicable 
substantiation requirements under section 170(f), a donor must obtain, 
with respect to each charitable contribution to a sponsoring 
organization to be maintained in a donor advised fund, a 
contemporaneous written acknowledgment from the sponsoring organization 
providing that the sponsoring organization has exclusive legal control 
over the assets contributed.
---------------------------------------------------------------------------
Statutory definition of a donor advised fund
      The Code defines a ``donor advised fund'' as a fund or 
account that is: (1) separately identified by reference to 
contributions of a donor or donors; (2) owned and controlled by 
a sponsoring organization; and (3) with respect to which a 
donor (or any person appointed or designated by such donor (a 
``donor advisor'')) has, or reasonably expects to have, 
advisory privileges with respect to the distribution or 
investment of amounts held in the separately identified fund or 
account by reason of the donor's status as a donor. All three 
prongs of the definition must be met in order for a fund or 
account to be treated as a donor advised fund.\1281\
---------------------------------------------------------------------------
    \1281\See sec. 4966(d)(2)(A). A donor advised fund does not include 
a fund or account that makes distributions only to a single identified 
organization or governmental entity. A donor advised fund also does not 
include certain funds or accounts with respect to which a donor or 
donor advisor provides advice as to which individuals receive grants 
for travel, study, or other similar purposes. In addition, the 
Secretary may exempt a fund or account from treatment as a donor 
advised fund if such fund or account is advised by a committee not 
directly or indirectly controlled by a donor, donor advisor, or persons 
related to a donor or donor advisor. The Secretary also may exempt a 
fund or account from treatment as a donor advised fund if such fund or 
account benefits a single identified charitable purpose. Secs. 
4966(d)(2)(B) and (C).
---------------------------------------------------------------------------
      A ``sponsoring organization'' is an organization that: 
(1) is described in section 170(c)\1282\ (other than a 
governmental entity described in section 170(c)(1), and without 
regard to any requirement that the organization be organized in 
the United States);\1283\ (2) is not a private foundation (as 
defined in section 509(a)); and (3) maintains one or more donor 
advised funds.\1284\
---------------------------------------------------------------------------
    \1282\Section 170(c) describes organizations to which charitable 
contributions that are deductible for income tax purposes can be made.
    \1283\See sec. 170(c)(2)(A).
    \1284\Sec. 4966(d)(1).
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Reporting and disclosure
      Each sponsoring organization must disclose on its 
information return: (1) the total number of donor advised funds 
it owns; (2) the aggregate value of assets held in those funds 
at the end of the organization's taxable year; and (3) the 
aggregate contributions to and grants made from those funds 
during the year.\1285\ In addition, when seeking recognition of 
its tax-exempt status, a sponsoring organization must disclose 
whether it intends to maintain donor advised funds.\1286\
---------------------------------------------------------------------------
    \1285\Sec. 6033(k).
    \1286\Sec. 508(f).
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                               HOUSE BILL

      The provision requires a sponsoring organization to 
report additional information on its annual information return 
(Form 990). Sponsoring organizations must indicate: (1) the 
average amount of grants made from donor advised funds during 
the taxable year (expressed as a percentage of the value of 
assets held in such funds at the beginning of the taxable 
year), and (2) whether the organization has a policy with 
respect to donor advised funds relating to the frequency and 
minimum level of distributions from donor advised funds. The 
sponsoring organization must include with its return a copy of 
any such policy.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.

                      INTERNATIONAL TAX PROVISIONS

                              PRESENT LAW

      The following discussion provides an overview of general 
principles of taxation of cross-border activity as well as a 
detailed explanation of provisions in present law that are 
relevant to the provisions in the bill.

      A. General Overview of International Principles of Taxation

      International law generally recognizes the right of each 
sovereign nation to prescribe rules to regulate conduct with a 
sufficient nexus to the sovereign nation. The nexus may be 
based on nationality of the actor, i.e., a nexus between said 
conduct and a person (whether natural or juridical) with a 
connection to the sovereign nation, or it may be territorial, 
i.e., a nexus between the conduct to be regulated and the 
territory where the conduct occurs.\1287\ For example, most 
legal systems respect limits on the extent to which their 
measures may be given extraterritorial effect. The broad 
acceptance of such norms extends to authority to regulate 
cross-border trade and economic dealings, including taxation.
---------------------------------------------------------------------------
    \1287\American Law Institute, Restatement (Third) of Foreign 
Relations Law of the United States, secs. 402 and 403, (1987).
---------------------------------------------------------------------------
      The exercise of sovereign jurisdiction is usually based 
on either nationality of the person whose conduct is regulated 
or the territory in which the conduct or activity occurs. These 
concepts have been refined and, in varying combinations, 
adapted to form the principles for determining whether 
sufficient nexus with a jurisdiction exists to conclude that 
the jurisdiction may enforce its right to impose a tax. The 
elements of nexus and the nomenclature of the principles may 
differ based on the type of tax in question. Taxes are 
categorized as either direct taxes or indirect taxes. The 
former category generally refers to those taxes that are 
imposed directly on a person (``capitation tax''), property, or 
income from property and that cannot be shifted to another 
person by the taxpayer. In contrast, indirect taxes are taxes 
on consumption or production of goods or services, for which a 
taxpayer may shift responsibility to another person. Such taxes 
include sales or use taxes, value-added taxes, or customs 
duties.\1288\
---------------------------------------------------------------------------
    \1288\Maria S. Cox, Fritz Neumark, et al., ``Taxation'' 
Encyclopedia Britannica, https://www.britannica.com/topic/taxation/
Classes-of-taxes, accessed May 16, 2017. Whether a tax is considered a 
direct tax or indirect tax has varied over time, and no single 
definition is used. For a review of the significance of these terms in 
Federal tax history, see Alan O. Dixler, ``Direct Taxes Under the 
Constitution: A Review of the Precedents,'' Tax History Project, Tax 
Analysts, available at http://www.taxhistory.org/thp/readings.nsf/
ArtWeb/2B34C7FBDA41D9DA8525730800067017?OpenDocument, accessed May 17, 
2017.
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      Although governments have imposed direct taxes on 
property and indirect taxes and duties on specific transactions 
since ancient times, the history of direct taxes in the form of 
an income tax is relatively recent.\1289\ When determining how 
to allocate the right to tax a particular item of income, most 
jurisdictions consider principles based on either source 
(territory or situs of the income) or residence (nationality of 
the taxpayer).\1290\ By contrast, when the authority to collect 
indirect taxes in the form of sales taxes or value added taxes 
is under consideration, jurisdictions analyze the taxing rights 
in terms of the origin principle or destination principle. The 
balance of this Part I.A describes the principles in more 
detail and how jurisdictions resolve claims of overlapping 
jurisdiction.
---------------------------------------------------------------------------
    \1289\The earliest western income tax system is traceable to the 
British Tax Act of 1798, enacted in 1799 to raise funds needed to 
prosecute the Napoleonic Wars, and rescinded in 1816. See, A.M. 
Bardopoulos, eCommerce and the Effects of Technology on Taxation, Law, 
Governance and Technology Series 22, DOI 10.1007/978-3-319-15449-7_2, 
(Springer 2015), at Section 2.2. ``History of Tax,'' pp. 23-24. See 
also, http://www.parliament.uk/about/living-heritage/
transformingsociety/private-lives/taxation/overview/incometax/.
    \1290\Reuven Avi-Yonah, ``International Tax as International Law,'' 
57 Tax Law Review 483 (2003-2004).
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1. Origin and destination principles
      Indirect taxes that are imposed based on the place where 
production of goods or services occur, irrespective of the 
location of the persons who own the means of production, and 
where the goods and services go after being produced, are 
examples of origin-based taxes. If, instead, authority to tax a 
transaction or service is dependent on the location of use or 
consumption of the goods or services, the tax system is an 
example of a destination-based tax. The most common form of a 
destination-based tax is the destination-based value-added tax 
(``VAT''). Over 160 countries have adopted a VAT,\1291\ which 
is generally a tax imposed and collected on the ``value added'' 
at every stage in the production and distribution of a good or 
service. Although there are several ways to compute the taxable 
base for a VAT, the amount of value added can generally be 
thought of as the difference between the value of sales 
(outputs) and purchases (inputs) of a business.\1292\ The 
United States does not have a VAT, nor is there a Federal sales 
or use tax. However, the majority of the States have enacted 
sales or use taxes, including both origin-based taxes and 
destination-based taxes.\1293\
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    \1291\Alan Schenk, Victor Thuronyi, and Wei Cui, Value Added Tax: A 
Comparative Approach, Cambridge University Press, 2015. Consistent with 
the OECD International VAT/GST Guidelines, supra, the term VAT is used 
to refer to all broad-based final consumption taxes, regardless of the 
acronym used to identify. Thus, many countries that denominate their 
national consumption tax as a GST (general sales tax) are included in 
the estimate of the number of countries with a VAT.
    \1292\Nearly all countries use the credit-invoice method of 
calculating value added to determine VAT liability. Under the credit-
invoice method, a tax is imposed on the seller for all of its sales. 
The tax is calculated by applying the tax rate to the sales price of 
the good or service, and the amount of tax is generally disclosed on 
the sales invoice. A business credit is provided for all VAT levied on 
purchases of taxable goods and services (i.e., ``inputs'') used in the 
seller's business. The ultimate consumer (i.e., a non-business 
purchaser), however, does not receive a credit with respect to his or 
her purchases. The VAT credit for inputs prevents the imposition of 
multiple layers of tax with respect to the total final purchase price 
(i.e., a ``cascading'' of the VAT). As a result, the net tax paid at a 
particular stage of production or distribution is based on the value 
added by that taxpayer at that stage of production or distribution. In 
theory, the total amount of tax paid with respect to a good or service 
from all levels of production and distribution should equal the sales 
price of the good or service to the ultimate consumer multiplied by the 
VAT rate.
    In order to receive an input credit with respect to any purchase, a 
business purchaser is generally required to possess an invoice from a 
seller that contains the name of the purchaser and indicates the amount 
of tax collected by the seller on the sale of the input to the 
purchaser. At the end of a reporting period, a taxpayer may calculate 
its tax liability by subtracting the cumulative amount of tax stated on 
its purchase invoices from the cumulative amount of tax stated on its 
sales invoices.
    \1293\EY, Worldwide VAT, GST and Sales Tax Guide 2015, p. 1021, 
available at http://www.ey.com/Publication/ vwLUAssets/ Worldwide-VAT-
GST- and-sales-tax-guide-2015/$FILE/ Worldwide%20VAT,%20GST%20 
and%20Sales%20Tax%20 Guide%202015.pdf.renee
---------------------------------------------------------------------------
      With respect to cross-border transactions, the OECD has 
recommended that the destination principle be adopted for all 
indirect taxes, in part to conform to the treatment of such 
transactions for purposes of customs duties. The OECD defines 
the destination principle as ``the principle whereby, for 
consumption tax purposes, internationally traded services and 
intangibles should be taxed according to the rules of the 
jurisdiction of consumption.''\1294\ A jurisdiction may 
determine the place of use or consumption by adopting the 
convention that the place of business or residence of a 
customer is the place of consumption. Use of such proxies are 
needed to determine the location of businesses that are 
juridical entities, which are more able than natural persons to 
move the location of use of goods, services or intangibles in 
response to imposition of tax.
---------------------------------------------------------------------------
    \1294\See, OECD, ``Recommendation of the Council on the application 
of value added tax/goods and services tax to the international trade in 
services and intangibles as approved on September 27, 2016,'' 
[C(2016)120], appendix, page 3, reproduced in the appendix, OECD, 
International VAT/GST Guidelines, OECD Publishing, 2017.
---------------------------------------------------------------------------
2. Source and residence principles
      Exercise of taxing authority based on a person's 
residence may be based on status as a national, resident, or 
domiciliary of a jurisdiction and may reach worldwide 
activities of such persons. As such, it is the broadest 
assertion of taxing authority. For individuals, the test for 
residence may depend upon nationality, or a physical presence 
test, or some combination of the two. For all other persons, 
determining residency may require more complex consideration of 
the level of activities within a jurisdiction, management, 
control or place of incorporation. Such rules generally reflect 
a policy decision about the requisite level of activity within, 
or contact with, a jurisdiction by a person that is sufficient 
to warrant assertion of taxing jurisdiction.
      Source-based exercise of taxing authority taxes income 
from activities that occur, or property that is located, within 
the territory of the taxing jurisdiction. If a person conducts 
business or owns property in a jurisdiction, or if a 
transaction occurs in whole or in part in a jurisdiction, the 
resulting taxation may require allocation and apportionment of 
expenses attributable to the activity in order to ensure that 
only the portion of profits that have the required nexus with 
the territory are subject to tax. Most jurisdictions, including 
the United States, have rules for determining the source of 
items of income and expense in a broad range of categories such 
as compensation for services, dividends, interest, royalties 
and gains.
      Regardless of which of these two bases of taxing 
authority is chosen by a jurisdiction, a jurisdiction's 
determination of whether a transaction, activity or person is 
subject to tax requires that the jurisdiction establish the 
limits on its assertion of authority to tax.
3. Resolving overlapping or conflicting jurisdiction to tax
      Countries have developed norms about what constitutes a 
reasonable regulatory action by a sovereign state that will be 
respected by other sovereign states. Consensus on what 
constitutes a reasonable limit on the extent of one state's 
jurisdiction helps to minimize the risk of conflicts arising as 
a result of extraterritorial action by a state or overlapping 
exercise of authority by states. Mechanisms to eliminate double 
taxation have developed to address those situations in which 
the source and residency determinations of the respective 
jurisdictions result in duplicative assertion of taxing 
authority. For example, asymmetry between different standards 
adopted in two countries for determining residency of persons, 
source of income, or other basis for taxation may result in 
income that is subject to taxation in both jurisdictions.
      When the rules of two or more countries overlap, 
potential double taxation is usually mitigated by operation of 
bilateral tax treaties or by legislative measures permitting 
credit for taxes paid to another jurisdiction. The United 
States is a partner in numerous bilateral agreements that have 
as their objective the avoidance of international double 
taxation and the prevention of tax avoidance and evasion. 
Another related objective of U.S. tax treaties is the removal 
of the barriers to trade, capital flows, and commercial travel 
that may be caused by overlapping tax jurisdictions and by the 
burdens of complying with the tax laws of a jurisdiction when a 
person's contacts with, and income derived from, that 
jurisdiction are minimal. The United States Model Income Tax 
Convention (``U.S. Model Treaty of 2016'') with an accompanying 
Preamble by the Department of Treasury, reflects the most 
recent comprehensive statement of U.S. negotiating position 
with respect to tax treaties.\1295\ Bilateral agreements are 
also used to permit limited mutual administrative assistance 
between jurisdictions.\1296\
---------------------------------------------------------------------------
    \1295\The current U.S. Model treaty was published February 17, 
2016, and is available at https://www.treasury.gov/ resource-center/ 
tax-policy/ treaties/ Documents/Treaty-US%20Model-2016.pdf; the 
Preamble is available at https://www.treasury.gov/resource-center/tax-
policy/treaties/Documents/Preamble-US%20Model-2016.pdf. The U.S. Model 
treaty is updated periodically to reflect developments in the 
negotiating position of the United States. Such changes include 
provisions that were successfully included in bilateral treaties 
concluded by the United States, as well as new proposed measures not 
yet included in a bilateral agreement.
    \1296\Although U.S. courts extend comity to foreign judgments in 
some instances, they are not required to recognize or assist in 
enforcement of foreign judgments for collection of taxes, consistent 
with the common law ``revenue rule'' in Holman v. Johnson, 1 Cowp. 341, 
98 Eng. Rep. 1120 (K.B.1775). American Law Institute, Restatement 
(Third) of Foreign Relations Law of the United States, sec. 483, 
(1987). The rule retains vitality in U.S. case law. Pasquantino v. 
United States, 544 U.S. 349; 125 S. Ct. 1766; 161 L. Ed. 2d 619 (2005) 
(a conviction for criminal wire fraud arising from an intent to defraud 
Canadian tax authorities was found not to conflict ``with any well-
established revenue rule principle[,]'' and thus was not in derogation 
of the revenue rule). To the extent it is abrogated, it is done so in 
bilateral treaties, to ensure reciprocity. At present, the United 
States has such agreements in force with five jurisdictions: Canada; 
Denmark; France; Netherlands; and Sweden.
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      In addition to entering into bilateral treaties, 
countries have worked in multilateral organizations to develop 
common principles to alleviate double taxation. Those 
principles are generally reflected in the provisions of the 
Model Tax Convention on Income and on Capital of the 
Organization for Economic Cooperation and Development (the 
``OECD Model treaty''),\1297\ a precursor of which was first 
developed by a predecessor organization in 1958, which in turn 
has antecedents from work by the League of Nations in the 
1920s.\1298\ As a consensus document, the OECD Model treaty is 
intended to serve as a model for countries to use in 
negotiating a bilateral treaty that would settle issues of 
double taxation as well as to avoid inappropriate double 
nontaxation. The provisions have developed over time as 
practice with actual bilateral treaties leads to unexpected 
results and new issues are raised by parties to the 
treaties.\1299\
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    \1297\OECD (2014), Model Tax Convention on Income and on Capital: 
Condensed Version 2014, OECD Publishing, 2014, available at http://
dx.doi.org/10.1787//mtc_cond-2014-en. The multinational organization 
was first established in 1961 by the United States, Canada and 18 
European countries, dedicated to global development, and has since 
expanded to 35 members.
    \1298\``Report by the Experts on Double Taxation,'' League of 
Nation Document E.F.S. 73/F19 (1923), a report commissioned by the 
League at its second assembly. See also, Lara Friedlander and Scott 
Wilkie, ``Policy Forum: The History of Tax Treaty Provisions--And Why 
It Is Important to Know About It,'' 54 Canadian Tax Journal No. 4 
(2006).
    \1299\For example, the OECD initiated a multi-year study on base-
erosion and profit shifting in response to concerns of multiple 
members. For an overview of that project, see Joint Committee on 
Taxation, Background, Summary, and Implications of the OECD/G20 Base 
Erosion and Profit Shifting Project (JCX-139-15), November 30, 2015. 
This document can also be found on the Joint Committee on Taxation 
website at www.jct.gov.
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4. International principles as applied in the U.S. system
      Present law combines taxation of all U.S. persons on 
their worldwide income, whether derived in the United States or 
abroad, with limited deferral of taxation of income earned by 
foreign subsidiaries of U.S. companies and source-based 
taxation of the U.S.-source income of nonresident aliens and 
foreign entities. Under this system (sometimes described as the 
U.S. hybrid system), the application of the Code differs 
depending on whether income arises from outbound investment or 
inbound investment. Outbound investment refers to the foreign 
activities of U.S. persons, while inbound investment is 
investment by foreign persons in U.S. assets or activities, 
although certain rules are common to both inbound and outbound 
activities.

         B. Principles Common to Inbound and Outbound Taxation

      Although the U.S. tax rules differ depending on whether 
the activity in question is inbound or outbound, there are 
certain concepts that apply to both inbound and outbound 
investment. Such areas include the transfer pricing rules, 
entity classification, the rules for determination of source, 
and whether a corporation is foreign or domestic.
1. Residence
      U.S. persons are subject to tax on their worldwide 
income. The Code defines U.S. person to include all U.S. 
citizens and residents as well as domestic entities such as 
partnerships, corporations, estates and certain trusts.\1300\ 
The term ``resident'' is defined only with respect to natural 
persons. Noncitizens who are lawfully admitted as permanent 
residents of the United States in accordance with immigration 
laws (colloquially referred to as green card holders) are 
treated as residents for tax purposes. In addition, noncitizens 
who meet a substantial presence test and are not otherwise 
exempt from U.S. taxation are also taxable as U.S. 
residents.\1301\
---------------------------------------------------------------------------
    \1300\Sec. 7701(a)(30).
    \1301\Sec. 7701(b).
---------------------------------------------------------------------------
      For legal entities, the Code determines whether an entity 
is subject to U.S. taxation on its worldwide income on the 
basis of its place of organization. For purposes of U.S. tax 
law, a corporation or partnership is treated as domestic if it 
is organized or created under the laws of the United States or 
of any State, unless, in the case of a partnership, the 
Secretary prescribes otherwise by regulation.\1302\ All other 
partnerships and corporations (that is, those organized under 
the laws of foreign countries) are treated as foreign.\1303\ In 
contrast, place of organization is not determinative of 
residence under taxing jurisdictions that use factors such as 
situs, management and control to determine residence. As a 
result, legal entities may have more than one tax residence, 
or, in some case, no residence.\1304\ Only domestic 
corporations are subject to U.S. tax on a worldwide basis. 
Foreign corporations are taxed only on income that has a 
sufficient connection with the United States.
---------------------------------------------------------------------------
    \1302\Sec. 7701(a)(4).
    \1303\Secs. 7701(a)(5) and 7701(a)(9). Entities organized in a 
possession or territory of the United States are not considered to have 
been organized under the laws of the United States.
    \1304\``The notion of corporate residence is an important 
touchstone of taxation, however, in many foreign income tax 
systems[,]'' with the result that the bilateral treaties are often 
relied upon to resolve conflicting claims of taxing jurisdiction. 
Joseph Isenbergh, Vol. 1 U.S. Taxation of Foreign Persons and Foreign 
Income, Para. 7.1 (Fourth Ed. 2016).
---------------------------------------------------------------------------
      Tax benefits otherwise available to a domestic 
corporation that migrates its tax home from the United States 
to foreign jurisdiction may be denied to such corporation, in 
which case it continues to be treated as a domestic corporation 
for ten years following such migration.\1305\ These sanctions 
generally apply to a transaction in which, pursuant to a plan 
or a series of related transactions: (1) a domestic corporation 
becomes a subsidiary of a foreign-incorporated entity or 
otherwise transfers substantially all of its properties to such 
an entity in a transaction completed after March 4, 2003; (2) 
the former shareholders of the domestic corporation hold (by 
reason of the stock they had held in the domestic corporation) 
at least 60 percent but less than 80 percent (by vote or value) 
of the stock of the foreign-incorporated entity after the 
transaction (this stock often being referred to as ``stock held 
by reason of''); and (3) the foreign-incorporated entity, 
considered together with all companies connected to it by a 
chain of greater than 50 percent ownership (that is, the 
``expanded affiliated group''), does not have substantial 
business activities in the entity's country of incorporation, 
compared to the total worldwide business activities of the 
expanded affiliated group.\1306\
---------------------------------------------------------------------------
    \1305\Sec. 7874.
    \1306\Section 7874(a). In addition, an excise tax may be imposed on 
certain stock compensation of executives of companies that undertake 
inversion transactions. Sec. 4985.
---------------------------------------------------------------------------
      The Treasury Department and the IRS have promulgated 
detailed guidance, through both regulations and several 
notices, addressing these requirements under section 7874 since 
the section was enacted in 2004,\1307\ and have sought to 
expand the reach of the section or reduce the tax benefits of 
inversion transactions. For example, Notice 2014-52 announced 
Treasury's and the IRS's intention to issue regulations and 
took a two-pronged approached. First, it addressed the 
treatment of cross-border combination transactions themselves. 
Second, it addressed post-transaction steps that taxpayers may 
undertake with respect to US-owned foreign subsidiaries making 
it more difficult to access foreign earnings without incurring 
added U.S. tax. On November 19, 2015, Treasury and the IRS 
issued Notice 2015-79, which announced their intent to issue 
further regulations to limit cross-border merger transactions, 
expanding on the guidance issued in Notice 2014-52. In 2016, 
Treasury and the IRS issued proposed and temporary regulations 
that incorporate the rules previously announced in Notice 2014-
52 and Notice 2015-79 and a new multiple domestic entity 
acquisition rule.\1308\
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    \1307\Notice 2015-79, 2015 I.R.B. LEXIS 583 (Nov. 19, 2015), which 
announced their intent to issue further regulations to limit cross-
border merger transactions, expanding on the guidance issued in Notice 
2014-52. On April 4, 2016, Treasury and the IRS issued proposed and 
temporary regulations (T.D. 9761) that incorporate the rules previously 
announced in Notice 2014-52 and Notice 2015-79 and a new multiple 
domestic entity acquisition rule. On January 13, 2017, Treasury and the 
IRS issued final and temporary regulations under section 7874 (T.D. 
9812), which adopt, with few changes, prior temporary and proposed 
regulations, which identify certain stock of an acquiring foreign 
corporation that is disregarded in calculating the ownership of the 
foreign corporation for purposes of section 7874.
    \1308\T.D. 9761, April 4, 2016. But see, Chamber of Commerce v 
Internal Revenue Service, Cause No 1:16-CV-944-LY (W.D. Tex. Sept. 29, 
2017), granting summary judgment to plaintiff in challenge to temporary 
regulations based on lack of compliance with Administrative Procedure 
Requirements.
---------------------------------------------------------------------------
      In early 2017, Treasury issued final and temporary 
regulations\1309\ that adopt, with few changes, the 2016 
temporary and proposed regulations.
---------------------------------------------------------------------------
    \1309\T.D. 9812, January 13, 2017.
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2. Entity classification
      Certain entities are eligible to elect their 
classification for Federal tax purposes under the ``check-the-
box'' regulations adopted in 1997.\1310\ Those regulations 
simplified the entity classification process for both taxpayers 
and the IRS by making the entity classification of 
unincorporated entities explicitly elective in most 
instances.\1311\ The eligibility to elect and the breadth of an 
entity's choices depend upon whether it is a ``per se 
corporation'' and its number of beneficial owners. Foreign as 
well as domestic entities may make the election. As a result, 
it is possible for an entity that operates across countries to 
be treated as a hybrid entity. A hybrid entity is one which is 
treated as a flow-through or disregarded entity for U.S. tax 
purposes but as a corporation for foreign tax purposes. For 
``reverse hybrid entities,'' the opposite is true. The election 
can affect the determination of the source of the income, 
availability of tax credits, and other tax attributes.
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    \1310\Treas. Reg. sec. 301.7701-1, et seq.
    \1311\The check-the-box regulations replaced Treas. Reg. sec. 
301.7701-2, as in effect prior to 1997, under which the classification 
of unincorporated entities for Federal tax purposes was determined on 
the basis of a four characteristics indicative of status as a 
corporation: continuity of life, centralization of management, limited 
liability, and free transferability of interests. An entity that 
possessed three or more of these characteristics was treated as a 
corporation; if it possessed two or fewer, then it was treated as a 
partnership. Thus, to achieve characterization as a partnership under 
this system, taxpayers needed to arrange the governing instruments of 
an entity in such a way as to eliminate two of these corporate 
characteristics. The advent and proliferation of limited liability 
companies (``LLCs'') under State laws allowed business owners to create 
customized entities that possessed a critical common feature--limited 
liability for investors--as well as other corporate characteristics the 
owners found desirable. As a consequence, classification was 
effectively elective for well-advised taxpayers.
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3. Source of income rules
      The rules for determining the source of certain types of 
income are specified in the Code and described briefly below. 
Various factors determine the source of income for U.S. tax 
purposes, including the status or nationality of the payor, the 
status or nationality of the recipient, the location of the 
recipient's activities that generate the income, and the 
location of the assets that generate the income. To the extent 
that the source of income is not specified by statute, the 
Treasury Secretary may promulgate regulations that explain the 
appropriate treatment. However, many items of income are not 
explicitly addressed by either the Code or Treasury 
regulations, sometimes resulting in nontaxation of the income. 
On several occasions, courts have determined the source of such 
items by applying the rule for the type of income to which the 
disputed income is most closely analogous, based on all facts 
and circumstances.\1312\
---------------------------------------------------------------------------
    \1312\See, e.g., Hunt v. Commissioner, 90 T.C. 1289 (1988).
---------------------------------------------------------------------------
Interest
      Interest is derived from U.S. sources if it is paid by 
the United States or any agency or instrumentality thereof, a 
State or any political subdivision thereof, or the District of 
Columbia. Interest is also from U.S. sources if it is paid by a 
resident or a domestic corporation on a bond, note, or other 
interest-bearing obligation.\1313\ Special rules apply to treat 
as foreign-source certain amounts paid on deposits with foreign 
commercial banking branches of U.S. corporations or 
partnerships and certain other amounts paid by foreign branches 
of domestic financial institutions.\1314\ Interest paid by the 
U.S. branch of a foreign corporation is also treated as U.S.-
source income.\1315\
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    \1313\Sec. 861(a)(1); Treas. Reg. sec. 1.861-2(a)(1).
    \1314\Secs. 861(a)(1) and 862(a)(1). For purposes of certain 
reporting and withholding obligations the source rule in section 
861(a)(1)(B) does not apply to interest paid by the foreign branch of a 
domestic financial institution. This results in the payment being 
treated as a withholdable payment. Sec. 1473(1)(C).
    \1315\Sec. 884(f)(1).
---------------------------------------------------------------------------
Dividends
      Dividend income is generally sourced by reference to the 
payor's place of incorporation.\1316\ Thus, dividends paid by a 
domestic corporation are generally treated as entirely U.S.-
source income. Similarly, dividends paid by a foreign 
corporation are generally treated as entirely foreign-source 
income. Under a special rule, dividends from certain foreign 
corporations that conduct U.S. businesses are treated in part 
as U.S.-source income.\1317\
---------------------------------------------------------------------------
    \1316\Secs. 861(a)(2), 862(a)(2).
    \1317\Sec. 861(a)(2)(B).
---------------------------------------------------------------------------
Rents and royalties
      Rental income is sourced by reference to the location or 
place of use of the leased property.\1318\ The nationality or 
the country of residence of the lessor or lessee does not 
affect the source of rental income. Rental income from property 
located or used in the United States (or from any interest in 
such property) is U.S.-source income, regardless of whether the 
property is real or personal, intangible or tangible.
---------------------------------------------------------------------------
    \1318\Sec. 861(a)(4).
---------------------------------------------------------------------------
      Royalties are sourced in the place of use of (or the 
place of privilege to use) the property for which the royalties 
are paid.\1319\ This source rule applies to royalties for the 
use of either tangible or intangible property, including 
patents, copyrights, secret processes, formulas, goodwill, 
trademarks, trade names, and franchises.
---------------------------------------------------------------------------
    \1319\Ibid.
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Income from sales of personal property
      Subject to significant exceptions, income from the sale 
of personal property is sourced on the basis of the residence 
of the seller.\1320\ For this purpose, special definitions of 
the terms ``U.S. resident'' and ``nonresident'' are provided. A 
nonresident is defined as any person who is not a U.S. 
resident,\1321\ while the term ``U.S. resident'' comprises any 
juridical entity which is a U.S. person, all U.S. citizens, as 
well as any individual who is a U.S. resident without a tax 
home in a foreign country or a nonresident alien with a tax 
home in the United States.\1322\ As a result, nonresident 
includes any foreign corporation.\1323\
---------------------------------------------------------------------------
    \1320\Sec. 865(a).
    \1321\Sec. 865(g)(1)(B).
    \1322\Sec. 865(g)(1)(A).
    \1323\Sec. 865(g).
---------------------------------------------------------------------------
      Several special rules apply. For example, income from the 
sale of inventory property is generally sourced to the place of 
sale, which is determined by where title to the property 
passes.\1324\ However, if the sale is by a nonresident and is 
attributable to an office or other fixed place of business in 
the United States, the sale is treated as income from U.S. 
sources without regard to the place of sale, unless it is sold 
for use, disposition, or consumption outside the United States 
and a foreign office materially participates in the sale.\1325\ 
Income from the sale of inventory property that a taxpayer 
produces (in whole or in part) in the United States and sells 
outside the United States, or that a taxpayer produces (in 
whole or in part) outside the United States and sells in the 
United States, is treated as partly U.S.-source and partly 
foreign-source.\1326\
---------------------------------------------------------------------------
    \1324\Secs. 865(b), 861(a)(6), 862(a)(6); Treas. Reg. sec. 1.861-
7(c).
    \1325\Sec. 865(e)(2).
    \1326\ Sec. 863(b). A taxpayer may elect one of three methods for 
allocating and apportioning income as U.S.- or foreign-source: (1) the 
50-50 method under which 50 percent of the income from the sale of 
inventory property in such a situation is attributable to the 
production activities and 50 percent to the sales activities, with the 
income sourced based on the location of those activities; (2) 
independent factory price (``IFP'') method under which, in certain 
circumstances, an IFP may be established by the taxpayer to determine 
income from production activities; (3) the books and records method 
under which, with advance permission, the taxpayer may use books of 
account to detail the allocation of receipts and expenditures between 
production and sales activities. Treas. Reg. sec. 1.863-3(b), (c). If 
production activity occurs only within the United States, or only 
within foreign countries, then all income is sourced to where the 
production activity occurs; when production activities occur in both 
the United States and one or more foreign countries, the income 
attributable to production activities must be split between U.S. and 
foreign sources. Treas. Reg. sec. 1.863-3(c)(1). The sales activity is 
generally sourced based on where title to the property passes. Treas. 
Reg. secs. 1.863-3(c)(2), 1.861-7(c).
---------------------------------------------------------------------------
      In determining the source of gain or loss from the sale 
or exchange of an interest in a foreign partnership, the IRS 
has taken the position that to the extent that there is 
unrealized gain attributable to partnership assets that are 
effectively connected with the U.S. business, the foreign 
person's gain or loss from the sale or exchange of a 
partnership interest is effectively connected gain or loss to 
the extent of the partner's distributive share of such 
unrealized gain or loss, and not capital gain or loss. 
Similarly, to the extent that the partner's distributive share 
of unrealized gain is attributable to a permanent establishment 
of the partnership under an applicable treaty provision, it may 
be subject to U.S. tax under a treaty.\1327\
---------------------------------------------------------------------------
    \1327\Rev. Rul. 91-32, 1991-1 C.B. 107. But see, Grecian Magnesite 
Mining, Industrial Shipping Co. SA v Commissioner, 149 T.C. No. 3 
(2017).
---------------------------------------------------------------------------
      Gain on the sale of depreciable property is divided 
between U.S.-source and foreign-source in the same ratio that 
the depreciation was previously deductible for U.S. tax 
purposes.\1328\ Payments received on sales of intangible 
property are sourced in the same manner as royalties to the 
extent the payments are contingent on the productivity, use, or 
disposition of the intangible property.\1329\
---------------------------------------------------------------------------
    \1328\Sec. 865(c).
    \1329\Sec. 865(d).
---------------------------------------------------------------------------
Personal services income
      Compensation for labor or personal services is generally 
sourced to the place-of-performance. Thus, compensation for 
labor or personal services performed in the United States 
generally is treated as U.S.-source income, subject to an 
exception for amounts that meet certain de minimis 
criteria.\1330\ Compensation for services performed both within 
and without the United States is allocated between U.S.-and 
foreign-source.\1331\
---------------------------------------------------------------------------
    \1330\Sec. 861(a)(3). Gross income of a nonresident alien 
individual, who is present in the United States as a member of the 
regular crew of a foreign vessel, from the performance of personal 
services in connection with the international operation of a ship is 
generally treated as foreign-source income.
    \1331\Treas. Reg. sec. 1.861-4(b).
---------------------------------------------------------------------------
Insurance income
      Underwriting income from issuing insurance or annuity 
contracts generally is treated as U.S.-source income if the 
contract involves property in, liability arising out of an 
activity in, or the lives or health of residents of, the United 
States.\1332\
---------------------------------------------------------------------------
    \1332\Sec. 861(a)(7).
---------------------------------------------------------------------------
Transportation income
      Transportation income is any income derived from, or in 
connection with, the use (or hiring or leasing for use) of a 
vessel or aircraft (or a container used in connection 
therewith) or the performance of services directly related to 
such use.\1333\ That definition does not encompass land 
transport except to the extent that it is directly related to 
shipping by vessel or aircraft, but regulations extend a 
similar rule for determining the source of income from 
transportation services other than shipping or aviation. 
Sources rules generally provide that income from furnishing 
transportation that both begins and ends in the United States 
is U.S.-source income,\1334\ and 50-percent of income 
attributable to transportation that either begins or the ends 
in the United States is treated as U.S.-source income. However, 
to the extent that the operator of a shipping or cruise line is 
foreign, its ownership structure and the maritime law\1335\ 
applicable for determining what constitutes international 
shipping as well as specific income tax provisions combine to 
create an industry-specific departure from the rules generally 
applicable.\1336\
---------------------------------------------------------------------------
    \1333\Sec. 863(c)(3).
    \1334\Sec. 863(c).
    \1335\U.S. law on navigation is codified in U.S. Code at title 33, 
and is consistent with the body of international maritime law. The 
normative principles of international maritime law for determining the 
maritime zones and territorial sovereignty over seas are embodied in 
the United Nations Convention on the Law of the Sea, first opened for 
signature in 1982. Since 1983, the Executive Branch has agreed that the 
treaty is generally consistent with existing international norms of the 
law of the sea and that the United States would act in conformity to 
the principles of the treaty other than those portions regarding deep 
seabed exploitation, even in the absence of ratification of the treaty.
    \1336\Due to the regulatory framework for aviation, an 
international flight must either originate or conclude in the country 
of residence of the airline's owner, where income tax for the 
international flight is assessed. In contrast to international 
shipping, international aviation cannot be carried out using flags-of-
convenience. Thus, although tax law treats shipping and aviation 
similarly, the differences between the two industries and the 
applicable regulatory regimes produce different tax outcomes. Full 
territorial sovereignty applies within 12 nautical miles of one's 
coast; the contiguous waters beyond 12 nautical miles but up to 24 
nautical miles are subject to some regulation. Within 200 nautical 
miles, a country may assert an economic zone for exploitation of living 
marine resources and some minerals. Beyond 200 nautical miles are the 
``high seas'' in which no sovereign state may assert exclusive 
jurisdiction.
---------------------------------------------------------------------------
      A subcategory of transportation income, ``U.S. source 
gross transportation income'' is subject to taxation on a gross 
basis at the rate of four percent.\1337\ Income is within the 
scope of this special tax if it is considered to be U.S. source 
because travel begins or ends in the United States, is not 
effectively connected, and is not of a kind to which the 
exemption from tax applies.\1338\
---------------------------------------------------------------------------
    \1337\Sec. 887(a). Special rules for determining whether 
transportation income is effectively connected with the conduct of a 
U.S. trade or business are also provided, and for coordinating the 
application of sections 871, 882, and 887.
    \1338\Sec. 887(b)(1).
---------------------------------------------------------------------------
      An exemption from U.S. tax is provided for transportation 
income of foreign persons from countries that extend reciprocal 
relief to U.S. persons. A nonresident alien individual with 
income from the international operation of a ship may qualify, 
provided that the foreign country in which such individual is 
resident grants an equivalent exemption to individual residents 
of the United States.\1339\ A similar exemption from U.S. tax 
is provided for gross income derived by a foreign corporation 
from the international operation of an aircraft, provided that 
the foreign country in which the corporation is organized 
grants an equivalent exemption to corporations organized in the 
United States.\1340\ To determine whether income from shipping 
or aviation is eligible for an exemption under section 883, one 
must examine the extent to which the foreign jurisdiction has 
extended reciprocity for U.S. businesses; whether the party 
claiming an exemption is eligible for the tax relief; and the 
nature of the activities that give rise to the income.
---------------------------------------------------------------------------
    \1339\Sec. 872(b)(1).
    \1340\Sec. 883(a)(2).
---------------------------------------------------------------------------
Income from space or ocean activities or international communications
      In the case of a foreign person, generally no income from 
a space or ocean activity or from international communications 
is treated as U.S.-source income.\1341\ With respect to the 
latter, an exception is provided if the foreign person 
maintains an office or other fixed place of business in the 
United States, in which case the international communications 
income attributable to such fixed place of business is treated 
as U.S.-source income.\1342\ For U.S. persons, all income from 
space or ocean activities and 50 percent of income from 
international communications is treated as U.S.-source income.
---------------------------------------------------------------------------
    \1341\Sec. 863(d).
    \1342\Sec. 863(e).
---------------------------------------------------------------------------
Amounts received with respect to guarantees of indebtedness
      Amounts received, directly or indirectly, from a 
noncorporate resident or from a domestic corporation for the 
provision of a guarantee of indebtedness of such person are 
income from U.S. sources.\1343\ This includes payments that are 
made indirectly for the provision of a guarantee. For example, 
U.S.-source income under this rule includes a guarantee fee 
paid by a foreign bank to a foreign corporation for the foreign 
corporation's guarantee of indebtedness owed to the bank by the 
foreign corporation's domestic subsidiary, where the cost of 
the guarantee fee is passed on to the domestic subsidiary 
through, for instance, additional interest charged on the 
indebtedness. In this situation, the domestic subsidiary has 
paid the guarantee fee as an economic matter through higher 
interest costs, and the additional interest payments made by 
the subsidiary are treated as indirect payments of the 
guarantee fee and, therefore, as income from U.S. sources.
---------------------------------------------------------------------------
    \1343\Sec. 861(a)(9). This provision effects a legislative override 
of the opinion in Container Corp. v. Commissioner, 134 T.C. 122 
(February 17, 2010), aff'd 2011 WL1664358, 107 A.F.T.R.2d 2011-1831 
(5th Cir. May 2, 2011), in which the Tax Court held that fees paid by a 
domestic corporation to its foreign parent with respect to guarantees 
issued by the parent for the debts of the domestic corporation were 
more closely analogous to compensation for services than to interest, 
and determined that the source of the fees should be determined by 
reference to the residence of the foreign parent-guarantor. As a 
result, the income was treated as income from foreign sources.
---------------------------------------------------------------------------
      Such U.S.-source income also includes amounts received 
from a foreign person, whether directly or indirectly, for the 
provision of a guarantee of indebtedness of that foreign person 
if the payments received are connected with income of such 
person that is effectively connected with the conduct of a U.S. 
trade or business. Amounts received from a foreign person, 
whether directly or indirectly, for the provision of a 
guarantee of that person's debt, are treated as foreign-source 
income if they are not from sources within the United States 
under section 861(a)(9).
4. Intercompany transfers
            Transfer pricing
      A basic U.S. tax principle applicable in dividing profits 
from transactions between related taxpayers is that the amount 
of profit allocated to each related taxpayer must be measured 
by reference to the amount of profit that a similarly situated 
taxpayer would realize in similar transactions with unrelated 
parties. The transfer pricing rules of section 482 and the 
accompanying Treasury regulations are intended to preserve the 
U.S. tax base by ensuring that taxpayers do not shift income 
properly attributable to the United States to a related foreign 
company through pricing that does not reflect an arm's-length 
result.\1344\ Similarly, the domestic laws of most U.S. trading 
partners include rules to limit income shifting through 
transfer pricing. The arm's-length standard is difficult to 
administer in situations in which no unrelated party market 
prices exist for transactions between related parties. When a 
foreign person with U.S. activities has transactions with 
related U.S. taxpayers, the amount of income attributable to 
U.S. activities is determined in part by the same transfer 
pricing rules of section 482 that apply when U.S. persons with 
foreign activities transact with related foreign taxpayers.
---------------------------------------------------------------------------
    \1344\For a detailed description of the U.S. transfer pricing 
rules, see Joint Committee on Taxation, Present Law and Background 
Related to Possible Income Shifting and Transfer Pricing (JCX-37-10), 
July 20, 2010, pp. 18-50.
---------------------------------------------------------------------------
      Section 482 authorizes the Secretary of the Treasury to 
allocate income, deductions, credits, or allowances among 
related business entities\1345\ when necessary to clearly 
reflect income or otherwise prevent tax avoidance, and 
comprehensive Treasury regulations under that section adopt the 
arm's-length standard as the method for determining whether 
allocations are appropriate.\1346\ The regulations generally 
attempt to identify the respective amounts of taxable income of 
the related parties that would have resulted if the parties had 
been unrelated parties dealing at arm's length. For income from 
intangible property, section 482 provides ``in the case of any 
transfer (or license) of intangible property (within the 
meaning of section 936(h)(3)(B)), the income with respect to 
such transfer or license shall be commensurate with the income 
attributable to the intangible.'' By requiring inclusion in 
income of amounts commensurate with the income attributable to 
the intangible, Congress was responding to concerns regarding 
the effectiveness of the arm's-length standard with respect to 
intangible property--including, in particular, high-profit-
potential intangibles.\1347\
---------------------------------------------------------------------------
    \1345\The term ``related'' as used herein refers to relationships 
described in section 482, which refers to ``two or more organizations, 
trades or businesses (whether or not incorporated, whether or not 
organized in the United States, and whether or not affiliated) owned or 
controlled directly or indirectly by the same interests.''
    \1346\Section 1059A buttresses section 482 by limiting the extent 
to which costs used to determine custom valuation can also be used to 
determine basis in property imported from a related party. A taxpayer 
that imports property from a related party may not assign a value to 
the property for cost purposes that exceeds its customs value.
    \1347\H.R. Rep. No. 99-426, p. 423.
---------------------------------------------------------------------------
            Gain recognition on outbound transfers
      If a transfer of intangible property to a foreign 
affiliate occurs in connection with certain corporate 
transactions, nonrecognition rules that may otherwise apply are 
suspended. The transferor of intangible property must recognize 
gain from the transfer as though he had sold the intangible 
(regardless of the stage of development of the intangible 
property) in exchange for payments contingent on the use, 
productivity or disposition of the transferred property in 
amounts that would have been received either annually over the 
useful life of the property or upon disposition of the property 
after the transfer.\1348\ The appropriate amounts of those 
imputed payments are determined using transfer-pricing 
principles. Final regulations issued in 2016 eliminate an 
exception under temporary regulations that permitted 
nonrecognition of gain from outbound transfers of foreign 
goodwill and going concern value. However, the Secretary 
announced that reinstatement of an exception for active trade 
or business is under consideration for cases with little 
potential for abuse and administrative difficulties.\1349\
---------------------------------------------------------------------------
    \1348\Sec. 367(d).
    \1349\See, T.D. 9803, 81 F.R. 91012 (December 17, 2016). Treas. 
Reg. sec. 1.367(d)-1(b) now provides that the rules of section 367(d) 
apply to transfers of intangible property as defined under Treas. Sec. 
1.367(a)-1(d)(5) after September 14, 2015, and to any transfers 
occurring before that date resulting from entity classification 
elections filed on or after September 15, 2015. Noting that commenters 
on the regulations had cited legislative history that contemplated 
active business exceptions, Treasury announced the reconsideration of 
the rule. U.S. Treasury Department, Second Report to the President on 
Identifying and Reducing Tax Regulatory Burdens, Executive Order 13789 
October 2, 2017, TNT Doc 2017-72131. The relevant legislative history 
is found at in H.R. Rep. No. 98-432, 98th Cong., 2d Sess. 1318-1320 
(March 5, 1984) and Conference Report, H.R. Rep. No. 98-861, 98th Cong. 
2d Sess. 951-957 (June 23, 1984).
---------------------------------------------------------------------------

    C. U.S. Tax Rules Applicable to Nonresident Aliens and Foreign 
                         Corporations (Inbound)

      Nonresident aliens and foreign corporations are generally 
subject to U.S. tax only on their U.S.-source income. Thus, the 
source and type of income received by a foreign person 
generally determines whether there is any U.S. income tax 
liability and the mechanism by which it is taxed. The U.S. tax 
rules for U.S. activities of foreign taxpayers apply 
differently to two broad types of income: U.S.-source income 
that is ``fixed or determinable annual or periodical gains, 
profits, and income'' (``FDAP income'') or income that is 
``effectively connected with the conduct of a trade or business 
within the United States'' (``ECI''). FDAP income generally is 
subject to a 30-percent gross-basis tax withheld at its source, 
while ECI is generally subject to the same U.S. tax rules that 
apply to business income derived by U.S. persons. That is, 
deductions are permitted in determining taxable ECI, which is 
then taxed at the same rates applicable to U.S. persons. Much 
FDAP income and similar income is, however, exempt from tax or 
is subject to a reduced rate of tax under the Code\1350\ or a 
bilateral income tax treaty.\1351\
---------------------------------------------------------------------------
    \1350\E.g., the portfolio interest exception in section 871(h) 
(discussed below).
    \1351\Because each treaty reflects considerations unique to the 
relationship between the two treaty countries, treaty withholding tax 
rates on each category of income are not uniform across treaties.
---------------------------------------------------------------------------
1. Gross-basis taxation of U.S.-source income.
      Non-business income received by foreign persons from U.S. 
sources is generally subject to tax on a gross basis at a rate 
of 30 percent, which is collected by withholding at the source 
of the payment. As explained below, the categories of income 
subject to the 30-percent tax and the categories for which 
withholding is required are generally coextensive, with the 
result that determining the withholding tax liability 
determines the substantive liability.
      The income of non-resident aliens or foreign corporations 
that is subject to tax at a rate of 30-percent includes FDAP 
income that is not effectively connected with the conduct of a 
U.S. trade or business.\1352\ The items enumerated in defining 
FDAP income are illustrative; the common characteristic of 
types of FDAP income is that taxes with respect to the income 
may be readily computed and collected at the source, in 
contrast to the administrative difficulty involved in 
determining the seller's basis and resulting gain from sales of 
property.\1353\ The words ``annual or periodical'' are ``merely 
generally descriptive'' of the payments that could be within 
the purview of the statute and do not preclude application of 
the withholding tax to one-time, lump sum payments to 
nonresident aliens.\1354\
---------------------------------------------------------------------------
    \1352\Secs. 871(a), 881. If the FDAP income is also ECI, it is 
taxed on a net basis, at graduated rates.
    \1353\Commissioner v. Wodehouse, 337 U.S. 369, 388-89 (1949). After 
reviewing legislative history of the Revenue Act of 1936, the Supreme 
Court noted that Congress expressly intended to limit taxes on 
nonresident aliens to taxes that could be readily collectible, i.e., 
subject to withholding, in response to ``a theoretical system 
impractical of administration in a great number of cases. H.R. Rep. No. 
2475, 74th Cong., 2d Sess. 9-10 (1936).'' In doing so, the Court 
rejected P.G. Wodehouse's arguments that an advance royalty payment was 
not within the purview of the statutory definition of FDAP income.
    \1354\Commissioner v. Wodehouse, 337 U.S. 369, 393 (1949).
---------------------------------------------------------------------------
      With respect to income from shipping, the gross basis tax 
potentially applicable is four percent,\1355\ unless the income 
is effectively connected with a U.S. trade or business, and 
thus subject to the graduated rates, as determined under rules 
specific to U.S.-source gross transportation income rather than 
the more broadly applicable rules defining effectively 
connected income in section 864(c). Even if the income is 
within the purview of those special rules, it may nevertheless 
be exempt if the income is derived from the international 
operation of a ship or aircraft by a foreign entity organized 
in a jurisdiction which provides a reciprocal exemption to U.S. 
entities.\1356\
---------------------------------------------------------------------------
    \1355\Sec. 887.
    \1356\Sec. 883(a)(1). In addition, to the extent provided in 
regulations, income from shipping and aviation is not subject to the 
four-percent gross basis tax if the income is of a type that is not 
subject to the reciprocal exemption for net basis taxation. See sec. 
887(b)(1). Comparable rules under section 872(b)(1) apply to income of 
nonresident alien individuals from shipping operations.
---------------------------------------------------------------------------
Types of FDAP income
      FDAP income encompasses a broad range of types of gross 
income, but has limited application to gains on sales of 
property, including market discount on bonds and option 
premiums.\1357\ Capital gains received by nonresident aliens 
present in the United States for fewer than 183 days are 
generally treated as foreign source and are thus not subject to 
U.S. tax, unless the gains are effectively connected with a 
U.S. trade or business; capital gains received by nonresident 
aliens present in the United States for 183 days or more\1358\ 
that are treated as income from U.S. sources are subject to 
gross-basis taxation.\1359\ In contrast, U.S-source gains from 
the sale or exchange of intangibles are subject to tax and 
withholding if they are contingent upon the productivity of the 
property sold and are not effectively connected with a U.S. 
trade or business.\1360\
---------------------------------------------------------------------------
    \1357\Although technically insurance premiums paid to a foreign 
insurer or reinsurer are FDAP income, they are exempt from withholding 
under Treas. Reg. sec. 1.1441-2(a)(7) if the insurance contract is 
subject to the excise tax under section 4371. Treas. Reg. secs. 1.1441-
2(b)(1)(i) and 1.1441-2(b)(2).
    \1358\For purposes of this rule, whether a person is considered a 
resident in the United States is determined by application of the rules 
under section 7701(b).
    \1359\Sec. 871(a)(2). In addition, certain capital gains from sales 
of U.S. real property interests are subject to tax as effectively 
connected income (or in some instances as dividend income) under the 
Foreign Investment in Real Property Tax Act of 1980 (``FIRPTA'').
    \1360\Secs. 871(a)(1)(D), 881(a)(4).
---------------------------------------------------------------------------
      Interest on bank deposits may qualify for exemption on 
two grounds, depending on where the underlying principal is 
held on deposit. Interest paid with respect to deposits with 
domestic banks and savings and loan associations, and certain 
amounts held by insurance companies, are U.S.-source income but 
are not subject to the U.S. tax when paid to a foreign person, 
unless the interest is effectively connected with a U.S. trade 
or business of the recipient.\1361\ Interest on deposits with 
foreign branches of domestic banks and domestic savings and 
loan associations is not treated as U.S.-source income and is 
thus exempt from U.S. tax (regardless of whether the recipient 
is engaged in a U.S. trade or business).\1362\ Similarly, 
interest and original issue discount on certain short-term 
obligations is also exempt from U.S. tax when paid to a foreign 
person.\1363\ Additionally, there is generally no information 
reporting required with respect to payments of such 
amounts.\1364\
---------------------------------------------------------------------------
    \1361\Secs. 871(i)(2)(A), 881(d); Treas. Reg. sec. 1.1441-
1(b)(4)(ii).
    \1362\Sec. 861(a)(1)(B); Treas. Reg. sec. 1.1441-1(b)(4)(iii).
    \1363\Secs. 871(g)(1)(B), 881(a)(3); Treas. Reg. sec. 1.1441-
1(b)(4)(iv).
    \1364\Treas. Reg. sec. 1.1461-1(c)(2)(ii)(A), (B). Regulations 
require a bank to report interest if the recipient is a nonresident 
alien who resides in a country with which the United States has a 
satisfactory exchange of information program under a bilateral 
agreement and the deposit is maintained at an office in the United 
States. Treas. Reg. secs. 1.6049-4(b)(5) and 1.6049-8. The IRS 
publishes lists of the countries whose residents are subject to the 
reporting requirements, and those countries with respect to which the 
reported information will be automatically exchanged. Rev. Proc. 2017-
31, available at https://www.irs.gov/pub/irs-drop/rp-17-31.pdf, 
supplementing Rev. Proc. 2014-64.
---------------------------------------------------------------------------
      Although FDAP income includes U.S.-source portfolio 
interest, such interest is specifically exempt from the 30-
percent gross-basis tax. Portfolio interest is any interest 
(including original issue discount) that is paid on an 
obligation that is in registered form and for which the 
beneficial owner has provided to the U.S. withholding agent a 
statement certifying that the beneficial owner is not a U.S. 
person.\1365\ For obligations issued before March 19, 2012, 
portfolio interest also includes interest paid on an obligation 
that is not in registered form, provided that the obligation is 
shown to be targeted to foreign investors under the conditions 
sufficient to establish deductibility of the payment of such 
interest.\1366\ Portfolio interest, however, does not include 
interest received by a 10-percent shareholder,\1367\ certain 
contingent interest,\1368\ interest received by a controlled 
foreign corporation from a related person,\1369\ or interest 
received by a bank on an extension of credit made pursuant to a 
loan agreement entered into in the ordinary course of its trade 
or business.\1370\
---------------------------------------------------------------------------
    \1365\Sec. 871(h)(2).
    \1366\Sec. 163(f)(2)(B). The exception to the registration 
requirements for foreign targeted securities was repealed in 2010, 
effective for obligations issued two years after enactment, thus 
narrowing the portfolio interest exemption for obligations issued after 
March 18, 2012. See Hiring Incentives to Restore Employment Law of 
2010, Pub. L. No. 111-147, sec. 502(b).
    \1367\Sec. 871(h)(3).
    \1368\Sec. 871(h)(4).
    \1369\Sec. 881(c)(3)(C).
    \1370\Sec. 881(c)(3)(A).
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Imposition of gross-basis tax and reporting by U.S. withholding agents
      The 30-percent tax on FDAP income is generally collected 
by means of withholding.\1371\ Withholding on FDAP payments to 
foreign payees is required unless the withholding agent,\1372\ 
i.e., the person making the payment to the foreign person 
receiving the income, can establish that the beneficial owner 
of the amount is eligible for an exemption from withholding or 
a reduced rate of withholding under an income tax treaty.\1373\ 
The principal statutory exemptions from the 30-percent tax 
apply to interest on bank deposits, and portfolio interest, 
described above.\1374\
---------------------------------------------------------------------------
    \1371\Secs. 1441, 1442.
    \1372\Withholding agent is defined broadly to include any U.S. or 
foreign person that has the control, receipt, custody, disposal, or 
payment of an item of income of a foreign person subject to 
withholding. Treas. Reg. sec. 1.1441-7(a).
    \1373\Secs. 871, 881, 1441, 1442; Treas. Reg. sec. 1.1441-1(b).
    \1374\A reduced rate of withholding of 14 percent applies to 
certain scholarships and fellowships paid to individuals temporarily 
present in the United States. Sec. 1441(b). In addition to statutory 
exemptions, the 30-percent tax with respect to interest, dividends and 
royalties may be reduced or eliminated by a tax treaty between the 
United States and the country in which the recipient of income 
otherwise subject to tax is resident.
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      In many instances, the income subject to withholding is 
the only income of the foreign recipient that is subject to any 
U.S. tax. No U.S. Federal income tax return from the foreign 
recipient is generally required with respect to the income from 
which tax was withheld, if the recipient has no ECI income and 
the withholding is sufficient to satisfy the recipient's 
liability. Accordingly, although the 30-percent gross-basis tax 
is a withholding tax, it is also generally the final tax 
liability of the foreign recipient (unless the foreign 
recipients files for a refund).
      A withholding agent that makes payments of U.S.-source 
amounts to a foreign person is required to report and pay over 
any amounts of U.S. tax withheld. The reports are due to be 
filed with the IRS by March 15 of the calendar year following 
the year in which the payment is made. Two types of reports are 
required: (1) a summary of the total U.S.-source income paid 
and withholding tax withheld on foreign persons for the year 
and (2) a report to both the IRS and the foreign person of that 
person's U.S.-source income that is subject to reporting.\1375\ 
The nonresident withholding rules apply broadly to any 
financial institution or other payor, including foreign 
financial institutions.\1376\
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    \1375\Treas. Reg. sec. 1.1461-1(b), (c).
    \1376\See Treas. Reg. sec. 1.1441-7(a) (definition of withholding 
agent includes foreign persons).
---------------------------------------------------------------------------
      To the extent that the withholding agent deducts and 
withholds an amount, the withheld tax is credited to the 
recipient of the income.\1377\ If the agent withholds more than 
is required, and results in an overpayment of tax, the excess 
may be refunded to the recipient of the income upon filing of a 
timely claim for refund.
---------------------------------------------------------------------------
    \1377\Sec. 1462.
---------------------------------------------------------------------------
Excise tax on foreign reinsurance premiums
      An excise tax applies to premiums paid to foreign 
insurers and reinsurers covering U.S. risks.\1378\ The excise 
tax is imposed on a gross basis at the rate of one percent on 
reinsurance and life insurance premiums, and at the rate of 
four percent on property and casualty insurance premiums. The 
excise tax does not apply to premiums that are effectively 
connected with the conduct of a U.S. trade or business or that 
are exempted from the excise tax under an applicable income tax 
treaty. The excise tax paid by one party cannot be credited if, 
for example, the risk is reinsured with a second party in a 
transaction that is also subject to the excise tax.
---------------------------------------------------------------------------
    \1378\Secs. 4371-4374.
---------------------------------------------------------------------------
      Many U.S. tax treaties provide an exemption from the 
excise tax, including the treaties with Germany, Japan, 
Switzerland, and the United Kingdom.\1379\ To prevent persons 
from inappropriately obtaining the benefits of exemption from 
the excise tax, the treaties generally include an anti-conduit 
rule. The most common anti-conduit rule provides that the 
treaty exemption applies to the excise tax only to the extent 
that the risks covered by the premiums are not reinsured with a 
person not entitled to the benefits of the treaty (or any other 
treaty that provides exemption from the excise tax).\1380\
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    \1379\Generally, when a foreign person qualifies for benefits under 
such a treaty, the United States is not permitted to collect the 
insurance premiums excise tax from that person.
    \1380\In Rev. Rul. 2008-15, 2008-1 C.B. 633, the IRS provided 
guidance to the effect that the excise tax is imposed separately on 
each reinsurance policy covering a U.S. risk. Thus, if a U.S. insurer 
or reinsurer reinsures a U.S. risk with a foreign reinsurer, and that 
foreign reinsurer in turn reinsures the risk with a second foreign 
reinsurer, the excise tax applies to both the premium to the first 
foreign reinsurer and the premium to the second foreign reinsurer. In 
addition, if the first foreign reinsurer is resident in a jurisdiction 
with a tax treaty containing an excise tax exemption, the revenue 
ruling provides that the excise tax still applies to both payments to 
the extent that the transaction violates an anti-conduit rule in the 
applicable tax treaty. Even if no violation of an anti-conduit rule 
occurs, under the revenue ruling, the excise tax still applies to the 
premiums paid to the second foreign reinsurer, unless the second 
foreign reinsurer is itself entitled to an excise tax exemption.
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2. Net-basis taxation of U.S.-source income
      The United States taxes on a net basis the income of 
foreign persons that is ``effectively connected'' with the 
conduct of a trade or business in the United States.\1381\ Any 
gross income derived by the foreign person that is not 
effectively connected with the person's U.S. business is not 
taken into account in determining the rates of U.S. tax 
applicable to the person's income from the business.\1382\
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    \1381\Secs. 871(b), 882.
    \1382\Secs. 871(b)(2), 882(a)(2).
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U.S. trade or business
      A foreign person is subject to U.S. tax on a net basis if 
the person is engaged in a U.S. trade or business. Partners in 
a partnership and beneficiaries of an estate or trust are 
treated as engaged in the conduct of a trade or business within 
the United States if the partnership, estate, or trust is so 
engaged.\1383\
---------------------------------------------------------------------------
    \1383\Sec. 875.
---------------------------------------------------------------------------
      The question whether a foreign person is engaged in a 
U.S. trade or business is factual and has generated much case 
law. Basic issues include whether the activity constitutes 
business rather than investing, whether sufficient activities 
in connection with the business are conducted in the United 
States, and whether the relationship between the foreign person 
and persons performing functions in the United States in 
respect of the business is sufficient to attribute those 
functions to the foreign person.
      The trade or business rules differ from one activity to 
another. The term ``trade or business within the United 
States'' expressly includes the performance of personal 
services within the United States.\1384\ If, however, a 
nonresident alien individual performs personal services for a 
foreign employer, and the individual's total compensation for 
the services and period in the United States are minimal 
($3,000 or less in total compensation and 90 days or fewer of 
physical presence in a year), the individual is not considered 
to be engaged in a U.S. trade or business.\1385\ Detailed rules 
govern whether trading in stocks or securities or commodities 
constitutes the conduct of a U.S. trade or business.\1386\ A 
foreign person who trades in stock or securities or commodities 
in the United States through an independent agent generally is 
not treated as engaged in a U.S. trade or business if the 
foreign person does not have an office or other fixed place of 
business in the United States through which trades are carried 
out. A foreign person who trades stock or securities or 
commodities for the person's own account also generally is not 
considered to be engaged in a U.S. business so long as the 
foreign person is not a dealer in stock or securities or 
commodities.
---------------------------------------------------------------------------
    \1384\Sec. 864(b).
    \1385\Sec. 864(b)(1).
    \1386\Sec. 864(b)(2).
---------------------------------------------------------------------------
      For eligible foreign persons, U.S. bilateral income tax 
treaties restrict the application of net-basis U.S. taxation. 
Under each treaty, the United States is permitted to tax 
business profits only to the extent those profits are 
attributable to a U.S. permanent establishment of the foreign 
person. The threshold level of activities that constitute a 
permanent establishment is generally higher than the threshold 
level of activities that constitute a U.S. trade or business. 
For example, a permanent establishment typically requires the 
maintenance of a fixed place of business over a significant 
period of time.
Effectively connected income
      A foreign person that is engaged in the conduct of a 
trade or business within the United States is subject to U.S. 
net-basis taxation on the income that is ``effectively 
connected'' with the business. Specific statutory rules govern 
whether income is ECI.\1387\
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    \1387\Sec. 864(c).
---------------------------------------------------------------------------
      In the case of U.S.-source capital gain and U.S.-source 
income of a type that would be subject to gross basis U.S. 
taxation, the factors taken into account in determining whether 
the income is ECI include whether the income is derived from 
assets used in or held for use in the conduct of the U.S. trade 
or business and whether the activities of the trade or business 
were a material factor in the realization of the amount (the 
``asset use'' and ``business activities'' tests).\1388\ Under 
the asset use and business activities tests, due regard is 
given to whether the income, gain, or asset was accounted for 
through the U.S. trade or business. All other U.S.-source 
income is treated as ECI.\1389\
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    \1388\Sec. 864(c)(2).
    \1389\Sec. 864(c)(3).
---------------------------------------------------------------------------
      A foreign person who is engaged in a U.S. trade or 
business may have limited categories of foreign-source income 
that are considered to be ECI.\1390\ Foreign-source income not 
included in one of these categories (described next) generally 
is exempt from U.S. tax.
---------------------------------------------------------------------------
    \1390\This income is subject to net-basis U.S. taxation after 
allowance of a credit for any foreign income tax imposed on the income. 
Sec. 906.
---------------------------------------------------------------------------
      A foreign person's income from foreign sources generally 
is considered to be ECI only if the person has an office or 
other fixed place of business within the United States to which 
the income is attributable and the income is in one of the 
following categories: (1) rents or royalties for the use of 
patents, copyrights, secret processes or formulas, good will, 
trade-marks, trade brands, franchises, or other like intangible 
properties derived in the active conduct of the trade or 
business; (2) interest or dividends derived in the active 
conduct of a banking, financing, or similar business within the 
United States or received by a corporation the principal 
business of which is trading in stocks or securities for its 
own account; or (3) income derived from the sale or exchange 
(outside the United States), through the U.S. office or fixed 
place of business, of inventory or property held by the foreign 
person primarily for sale to customers in the ordinary course 
of the trade or business, unless the sale or exchange is for 
use, consumption, or disposition outside the United States and 
an office or other fixed place of business of the foreign 
person in a foreign country participated materially in the sale 
or exchange.\1391\ Foreign-source dividends, interest, and 
royalties are not treated as ECI if the items are paid by a 
foreign corporation more than 50 percent (by vote) of which is 
owned directly, indirectly, or constructively by the recipient 
of the income.\1392\
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    \1391\Sec. 864(c)(4)(B).
    \1392\Sec. 864(c)(4)(D)(i).
---------------------------------------------------------------------------
      In determining whether a foreign person has a U.S. office 
or other fixed place of business, the office or other fixed 
place of business of an agent generally is disregarded. The 
place of business of an agent other than an independent agent 
acting in the ordinary course of business is not disregarded, 
however, if the agent either has the authority (regularly 
exercised) to negotiate and conclude contracts in the name of 
the foreign person or has a stock of merchandise from which he 
regularly fills orders on behalf of the foreign person.\1393\ 
If a foreign person has a U.S. office or fixed place of 
business, income, gain, deduction, or loss is not considered 
attributable to the office unless the office was a material 
factor in the production of the income, gain, deduction, or 
loss and the office regularly carries on activities of the type 
from which the income, gain, deduction, or loss was 
derived.\1394\
---------------------------------------------------------------------------
    \1393\Sec. 864(c)(5)(A).
    \1394\Sec. 864(c)(5)(B).
---------------------------------------------------------------------------
      Special rules apply in determining the ECI of an 
insurance company. The foreign-source income of a foreign 
corporation that is subject to tax under the insurance company 
provisions of the Code is treated as ECI if the income is 
attributable to its United States business.\1395\
---------------------------------------------------------------------------
    \1395\Sec. 864(c)(4)(C).
---------------------------------------------------------------------------
      Income, gain, deduction, or loss for a particular year 
generally is not treated as ECI if the foreign person is not 
engaged in a U.S. trade or business in that year.\1396\ If, 
however, income or gain taken into account for a taxable year 
is attributable to the sale or exchange of property, the 
performance of services, or any other transaction that occurred 
in a prior taxable year, the determination whether the income 
or gain is taxable on a net basis is made as if the income were 
taken into account in the earlier year and without regard to 
the requirement that the taxpayer be engaged in a trade or 
business within the United States during the later taxable 
year.\1397\ If any property ceases to be used or held for use 
in connection with the conduct of a U.S. trade or business and 
the property is disposed of within 10 years after the 
cessation, the determination whether any income or gain 
attributable to the disposition of the property is taxable on a 
net basis is made as if the disposition occurred immediately 
before the property ceased to be used or held for use in 
connection with the conduct of a U.S. trade or business and 
without regard to the requirement that the taxpayer be engaged 
in a U.S. business during the taxable year for which the income 
or gain is taken into account.\1398\
---------------------------------------------------------------------------
    \1396\Sec. 864(c)(1)(B).
    \1397\Sec. 864(c)(6).
    \1398\Sec. 864(c)(7).
---------------------------------------------------------------------------
      Transportation income from U.S. sources is treated as 
effectively connected with a foreign person's conduct of a U.S. 
trade or business only if the foreign person has a fixed place 
of business in the United States that is involved in the 
earning of such income and substantially all of such income of 
the foreign person is attributable to regularly scheduled 
transportation.\1399\ If the transportation income is 
effectively connected with conduct of a U.S. trade or business, 
the transportation income, along with transportation income 
that is from U.S. sources because the transportation both 
begins and ends in the United States, may be subject to net-
basis taxation. Income from the international operation of a 
ship or aircraft may be eligible for an exemption under section 
883, provided that the foreign jurisdiction has extended 
reciprocity for U.S. businesses;\1400\ whether the party 
claiming an exemption is eligible for the tax relief;\1401\ and 
the activities that give rise to the income qualify under 
relevant regulations.
---------------------------------------------------------------------------
    \1399\Sec. 887(b)(4).
    \1400\The most recent compilation of countries that the United 
States recognizes as providing exemptions lists countries in three 
groups: Twenty-seven countries are eligible for exemption on the basis 
of a review of the legislation in the foreign jurisdiction; 39 nations 
exchanged diplomatic notes with the United States that grant exemption 
to some extent; and more than 50 nations are parties with the United 
States to bilateral income tax treaties that include a shipping 
article. Rev. Rul. 2008-17, 2008-1 C.B. 626, modified by Ann. 2008-57, 
2008-C.B. 1192, 2008.
    \1401\Sec. 883(c) and regulations thereunder.
---------------------------------------------------------------------------
            Allowance of deductions
      Taxable ECI is computed by taking into account deductions 
associated with gross ECI. For this purpose, the apportionment 
and allocation of deductions is addressed in detailed 
regulations. The regulations applicable to deductions other 
than interest expense set forth general guidelines for 
allocating deductions among classes of income and apportioning 
deductions between ECI and non-ECI. In some circumstances, 
deductions may be allocated on the basis of units sold, gross 
sales or receipts, costs of goods sold, profits contributed, 
expenses incurred, assets used, salaries paid, space used, time 
spent, or gross income received. More specific guidelines are 
provided for the allocation and apportionment of research and 
experimental expenditures, legal and accounting fees, income 
taxes, losses on dispositions of property, and net operating 
losses. Detailed regulations under section 861 address the 
allocation and apportionment of interest deductions. In 
general, interest is allocated and apportioned based on assets 
rather than income.
3. Special rules

FIRPTA
      A foreign person's gain or loss from the disposition of a 
U.S. real property interest (``USRPI'') is treated as ECI and, 
therefore, as taxable at the income tax rates applicable to 
U.S. persons, including the rates for net capital gain. A 
foreign person subject to tax on this income is required to 
file a U.S. tax return under the normal rules relating to 
receipt of ECI.\1402\ In the case of a foreign corporation, the 
gain from the disposition of a USRPI may also be subject to the 
branch profits tax at a 30-percent rate (or lower treaty rate).
---------------------------------------------------------------------------
    \1402\Sec. 897(a).
---------------------------------------------------------------------------
      The payor of income that FIRPTA treats as ECI (``FIRPTA 
income'') is generally required to withhold U.S. tax from the 
payment.\1403\ The foreign person can request a refund with its 
U.S. tax return, if appropriate, based on that person's total 
ECI and deductions (if any) for the taxable year.
---------------------------------------------------------------------------
    \1403\Sec. 1445 and Treasury regulations thereunder.
---------------------------------------------------------------------------
Branch profits taxes
      A domestic corporation owned by foreign persons is 
subject to U.S. income tax on its net income. The earnings of 
the domestic corporation are subject to a second tax, this time 
at the shareholder level, when dividends are paid. As described 
previously, when the shareholders are foreign, the second-level 
tax is imposed at a flat rate and collected by withholding. 
Unless the portfolio interest exemption or another exemption 
applies, interest payments made by a domestic corporation to 
foreign creditors are likewise subject to U.S. tax. To 
approximate these second-level withholding taxes imposed on 
payments made by domestic subsidiaries to their foreign parent 
corporations, the United States taxes a foreign corporation 
that is engaged in a U.S. trade or business through a U.S. 
branch on amounts of U.S. earnings and profits that are shifted 
out of, or amounts of interest that are deducted by, the U.S. 
branch of the foreign corporation. These branch taxes may be 
reduced or eliminated under an applicable income tax 
treaty.\1404\
---------------------------------------------------------------------------
    \1404\See Treas. Reg. sec. 1.884-1(g), -5.
---------------------------------------------------------------------------
      Under the branch profits tax, the United States imposes a 
tax of 30 percent on a foreign corporation's ``dividend 
equivalent amount.''\1405\ The dividend equivalent amount 
generally is the earnings and profits of a U.S. branch of a 
foreign corporation attributable to its ECI.\1406\ Limited 
categories of earnings and profits attributable to a foreign 
corporation's ECI are excluded in calculating the dividend 
equivalent amount.\1407\
---------------------------------------------------------------------------
    \1405\Sec. 884(a).
    \1406\Sec. 884(b).
    \1407\See sec. 884(d)(2) (excluding, for example, earnings and 
profits attributable to gain from the sale of domestic corporation 
stock that constitutes a U.S. real property interest described in 
section 897.
---------------------------------------------------------------------------
      In arriving at the dividend equivalent amount, a branch's 
effectively connected earnings and profits are adjusted to 
reflect changes in a branch's U.S. net equity (that is, the 
excess of the branch's assets over its liabilities, taking into 
account only amounts treated as connected with its U.S. trade 
or business).\1408\ The first adjustment reduces the dividend 
equivalent amount to the extent the branch's earnings are 
reinvested in trade or business assets in the United States (or 
reduce U.S. trade or business liabilities). The second 
adjustment increases the dividend equivalent amount to the 
extent prior reinvested earnings are considered remitted to the 
home office of the foreign corporation.
---------------------------------------------------------------------------
    \1408\Sec. 884(b).
---------------------------------------------------------------------------
      Interest paid by a U.S. trade or business of a foreign 
corporation generally is treated as if paid by a domestic 
corporation and therefore is subject to U.S. 30-percent 
withholding tax (if the interest is paid to a foreign person 
and a Code or treaty exemption or reduction would not be 
available if the interest were actually paid by a domestic 
corporation).\1409\ Certain ``excess interest'' of a U.S. trade 
or business of a foreign corporation is treated as if paid by a 
U.S. corporation to a foreign parent and, therefore, is subject 
to U.S. 30-percent withholding tax.\1410\ For this purpose, 
excess interest is the excess of the interest expense of the 
foreign corporation apportioned to the U.S. trade or business 
over the amount of interest paid by the trade or business.
---------------------------------------------------------------------------
    \1409\Sec. 884(f)(1)(A).
    \1410\Sec. 884(f)(1)(B).
---------------------------------------------------------------------------
Earnings stripping
      Taxpayers are limited in their ability to reduce the U.S. 
tax on the income derived from their U.S. operations through 
certain earnings stripping transactions that involve interest 
payments. If the payor's debt-to-equity ratio exceeds 1.5 to 1 
(a debt-to-equity ratio of 1.5 to 1 or less is considered a 
``safe harbor''), a deduction for disqualified interest paid or 
accrued by the payor in a taxable year is generally disallowed 
to the extent of the payor's excess interest expense.\1411\ 
Disqualified interest includes interest paid or accrued to 
related parties when no Federal income tax is imposed with 
respect to such interest;\1412\ to unrelated parties in certain 
instances in which a related party guarantees the debt 
(``guaranteed debt''); or to a REIT by a taxable REIT 
subsidiary of that REIT. Excess interest expense is the amount 
by which the payor's net interest expense (that is, the excess 
of interest paid or accrued over interest income) exceeds 50 
percent of its adjusted taxable income (generally taxable 
income computed without regard to deductions for net interest 
expense, net operating losses, domestic production activities 
under section 199, depreciation, amortization, and depletion). 
Interest amounts disallowed under these rules can be carried 
forward indefinitely and are allowed as a deduction to the 
extent of excess limitation in a subsequent tax year. In 
addition, any excess limitation (that is, the excess, if any, 
of 50 percent of the adjusted taxable income of the payor over 
the payor's net interest expense) can be carried forward three 
years.
---------------------------------------------------------------------------
    \1411\Sec. 163(j).
    \1412\If a tax treaty reduces the rate of tax on interest paid or 
accrued by the taxpayer, the interest is treated as interest on which 
no Federal income tax is imposed to the extent of the same proportion 
of such interest as the rate of tax imposed without regard to the 
treaty, reduced by the rate of tax imposed under the treaty, bears to 
the rate of tax imposed without regard to the treaty. Sec. 
163(j)(5)(B).
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  D. U.S. Tax Rules Applicable to Foreign Activities of U.S. Persons 
                               (Outbound)

1. In general
      In general, income earned directly by a U.S. person from 
the conduct of a foreign business is taxed on a current 
basis,\1413\ but income earned indirectly from a separate legal 
entity operating the foreign business is not. Instead, active 
foreign business income earned by a U.S. person indirectly 
through an interest in a foreign corporation generally is not 
subject to U.S. tax until the income is distributed as a 
dividend to the U.S. person. Certain anti-deferral regimes may 
cause the U.S. owner to be taxed on a current basis in the 
United States on certain categories of passive or highly mobile 
income earned by the foreign corporation regardless of whether 
the income has been distributed as a dividend to the U.S. 
owner. The main anti-deferral regimes that provide such 
exceptions are the controlled foreign corporation (``CFC'') 
rules of subpart F\1414\ and the passive foreign investment 
company (``PFIC'') rules.\1415\ A foreign tax credit generally 
is available to offset, in whole or in part, the U.S. tax owed 
on foreign-source income, whether the income is earned directly 
by the domestic corporation, repatriated as an actual dividend, 
or included in the domestic parent corporation's income under 
one of the anti-deferral regimes.\1416\
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    \1413\A U.S. citizen or resident living abroad may be eligible to 
exclude from U.S. taxable income certain foreign earned income and 
foreign housing costs under section 911. For a description of this 
exclusion, see Present Law and Issues in U.S. Taxation of Cross-Border 
Income (JCX-42-11), September 6, 2011, p. 52.
    \1414\Secs. 951-964.
    \1415\Secs. 1291-1298.
    \1416\Secs. 901, 902, 960, 1293(f).
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2. Anti-deferral regimes
Subpart F
      Subpart F,\1417\ applicable to CFCs and their 
shareholders, is the main anti-deferral regime of relevance to 
a U.S.-based multinational corporate group. A CFC generally is 
defined as any foreign corporation if U.S. persons own 
(directly, indirectly, or constructively) more than 50 percent 
of the corporation's stock (measured by vote or value), taking 
into account only those U.S. persons that are within the 
meaning of the term ``United States shareholder,'' which refers 
only to those U.S. persons who own at least 10 percent of the 
stock (measured by vote only).\1418\
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    \1417\Secs. 951-964.
    \1418\Secs. 951(b), 957, 958. The term ``United States 
shareholder'' is used interchangeably herein with ``U.S. shareholder.''
---------------------------------------------------------------------------
            Subpart F income
      Under the subpart F rules, the United States generally 
taxes the 10-percent U.S. shareholders of a CFC on their pro 
rata shares of certain income of the CFC (referred to as 
``subpart F income''), without regard to whether the income is 
distributed to the shareholders.\1419\ In effect, the United 
States treats the 10-percent U.S. shareholders of a CFC as 
having received a current distribution of the corporation's 
subpart F income. With exceptions described below, subpart F 
income generally includes passive income and other income that 
is readily movable from one taxing jurisdiction to another. 
Subpart F income consists of foreign base company income,\1420\ 
insurance income,\1421\ and certain income relating to 
international boycotts and other violations of public 
policy.\1422\
---------------------------------------------------------------------------
    \1419\Sec. 951(a).
    \1420\Sec. 954.
    \1421\Sec. 953.
    \1422\Sec. 952(a)(3)-(5).
---------------------------------------------------------------------------
      Foreign base company income consists of foreign personal 
holding company income, which includes passive income such as 
dividends, interest, rents, and royalties, and a number of 
categories of income from business operations, including 
foreign base company sales income, foreign base company 
services income, and foreign base company oil-related 
income.\1423\
---------------------------------------------------------------------------
    \1423\Sec. 954.
---------------------------------------------------------------------------
      Insurance income subject to current inclusion under the 
subpart F rules includes any income of a CFC attributable to 
the issuing or reinsuring of any insurance or annuity contract 
in connection with risks located in a country other than the 
CFC's country of organization. Subpart F insurance income also 
includes income attributable to an insurance contract in 
connection with risks located within the CFC's country of 
organization as the result of an arrangement under which 
another corporation receives a substantially equal amount of 
consideration for insurance of other country risks. Finally, 
special rules apply under subpart F with respect to related 
person insurance income\1424\ in order to address captive 
insurance companies.\1425\ Under these rules, the threshold for 
determining control is reduced to 25 percent, and any level of 
stock ownership by a U.S. person in such corporation is 
sufficient for the person to be treated as a U.S. shareholder.
---------------------------------------------------------------------------
    \1424\Sec. 953(c). Related person insurance income is defined for 
this purpose to mean any insurance income attributable to a policy of 
insurance or reinsurance with respect to which the primary insured is 
either a U.S. shareholder (within the meaning of the provision) in the 
foreign corporation receiving the income or a person related to such a 
shareholder.
    \1425\Joint Committee on Taxation, General Explanation of the Tax 
Reform Act of 1986 (JCS-10-87), May 4, 1987, p. 968.
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Investments in U.S. property
      The 10-percent U.S. shareholders of a CFC also are 
required to include currently in income for U.S. tax purposes 
their pro rata shares of the corporation's untaxed earnings 
invested in certain items of U.S. property.\1426\ This U.S. 
property generally includes tangible property located in the 
United States, stock of a U.S. corporation, an obligation of a 
U.S. person, and certain intangible assets, such as patents and 
copyrights, acquired or developed by the CFC for use in the 
United States.\1427\ There are specific exceptions to the 
general definition of U.S. property, including for bank 
deposits, certain export property, and certain trade or 
business obligations.\1428\ The inclusion rule for investment 
of earnings in U.S. property is intended to prevent taxpayers 
from avoiding U.S. tax on dividend repatriations by 
repatriating CFC earnings through non-dividend payments, such 
as loans to U.S. persons.
---------------------------------------------------------------------------
    \1426\Secs. 951(a)(1)(B), 956.
    \1427\Sec. 956(c)(1).
    \1428\Sec. 956(c)(2).
---------------------------------------------------------------------------
Subpart F exceptions
      Several exceptions to the broad definition of subpart F 
income permit continued deferral for income from certain 
transactions, dividends, interest and certain rents and 
royalties received by a CFC from a related corporation 
organized and operating in the same foreign country in which 
the CFC is organized.\1429\ The same-country exception is not 
available to the extent that the payments reduce the subpart F 
income of the payor. A second exception from foreign base 
company income and insurance income is available for any item 
of income received by a CFC if the taxpayer establishes that 
the income was subject to an effective foreign income tax rate 
greater than 90 percent of the maximum U.S. corporate income 
tax rate (that is, more than 90 percent of 35 percent, or 31.5 
percent).\1430\
---------------------------------------------------------------------------
    \1429\Sec. 954(c)(3).
    \1430\Sec. 954(b)(4).
---------------------------------------------------------------------------
      A provision colloquially referred to as the ``CFC look-
through'' rule excludes from foreign personal holding company 
income dividends, interest, rents, and royalties received or 
accrued by one CFC from a related CFC (with relation based on 
control) to the extent attributable or properly allocable to 
non-subpart-F income of the payor.\1431\ The look-through rule 
applies to taxable years of foreign corporations beginning 
before January 1, 2020, and to taxable years of U.S. 
shareholders with or within which such taxable years of foreign 
corporations end.\1432\
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    \1431\Sec. 954(c)(6).
    \1432\See section 144 of the Protecting Americans from Tax Hikes 
Act of 2015 (Division Q of Pub. L. No. 114-113), H.R. 2029 [``the PATH 
Act of 2015''], which extended section 954(c)(6) for five years. 
Congress has previously extended the application of section 954(c)(6) 
several times, most recently in the Tax Increase Prevention Act of 
2014, Pub. L. No. 113-295; Pub. L. No. 107-147, sec. 614, 2002; Pub. L. 
No. 106-170, sec. 503, 1999; Pub. L. No. 105-277, 1998.
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      There is also an exclusion from subpart F income for 
certain income of a CFC that is derived in the active conduct 
of banking or financing business (``active financing income''), 
which applies to all taxable years of the foreign corporation 
beginning after December 31, 2014, and for taxable years of the 
shareholders that end during or within such taxable years of 
the corporation.\1433\ With respect to income derived in the 
active conduct of a banking, financing, or similar business, a 
CFC is required to be predominantly engaged in such business 
and to conduct substantial activity with respect to such 
business in order to qualify for the active financing 
exceptions. In addition, certain nexus requirements apply, 
which provide that income derived by a CFC or a qualified 
business unit (``QBU'') of a CFC from transactions with 
customers is eligible for the exceptions if, among other 
things, substantially all of the activities in connection with 
such transactions are conducted directly by the CFC or QBU in 
its home country, and such income is treated as earned by the 
CFC or QBU in its home country for purposes of such country's 
tax laws. Moreover, the exceptions apply to income derived from 
certain cross border transactions, provided that certain 
requirements are met.
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    \1433\Sec. 954(h). See section 128 of the PATH Act of 2015, which 
made the active financing exception permanent.
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      In the case of a securities dealer, an exception from 
foreign personal holding company income applies to any interest 
or dividend (or certain equivalent amounts) from any 
transaction, including a hedging transaction or a transaction 
consisting of a deposit of collateral or margin, entered into 
in the ordinary course of the dealer's trade or business as a 
dealer in securities within the meaning of section 475.\1434\ 
In the case of a QBU of the dealer, the income is required to 
be attributable to activities of the QBU in the country of 
incorporation, or to a QBU in the country in which the QBU both 
maintains its principal office and conducts substantial 
business activity. A coordination rule provides that, for 
securities dealers, this exception generally takes precedence 
over the exception for active financing income.
---------------------------------------------------------------------------
    \1434\Sec. 954(c)(2)(C).
---------------------------------------------------------------------------
      Income is treated as active financing income only if, 
among other requirements, it is derived by a CFC or by a QBU of 
that CFC. Certain activities conducted by persons related to 
the CFC or its QBU are treated as conducted directly by the CFC 
or QBU.\1435\ An activity qualifies under this rule if the 
activity is performed by employees of the related person and if 
the related person is an eligible CFC, the home country of 
which is the same as the home country of the related CFC or 
QBU; the activity is performed in the home country of the 
related person; and the related person receives arm's-length 
compensation that is treated as earned in the home country. 
Income from an activity qualifying under this rule is excluded 
from subpart F income so long as the other active financing 
requirements are satisfied.
---------------------------------------------------------------------------
    \1435\Sec. 954(h)(3)(E).
---------------------------------------------------------------------------
      Certain income of a qualifying branch of a qualifying 
insurance company with respect to risks located within the home 
country of the branch or within the CFC's country of creation 
or organization are also excepted from foreign personal holding 
company income, provided that certain requirements are met. 
Further, additional exceptions from insurance income and from 
foreign personal holding company income apply for certain 
income of certain CFCs or branches with respect to risks 
located in a country other than the United States, provided 
that the requirements for these exceptions, including reserve 
requirements, are met.\1436\
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    \1436\Subject to approval by the IRS, a taxpayer may establish that 
the reserve of a life insurance company for life insurance and annuity 
contracts is the amount taken into account in determining the foreign 
statement reserve for the contract (reduced by catastrophe, 
equalization, or deficiency reserve or any similar reserve). IRS 
approval is to be based on whether the method, the interest rate, the 
mortality and morbidity assumptions, and any other factors taken into 
account in determining foreign statement reserves (taken together or 
separately) provide an appropriate means of measuring income for 
Federal income tax purposes.
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Exclusion of previously taxed earnings and profits
      A 10-percent U.S. shareholder of a CFC may exclude from 
its income actual distributions of earnings and profits from 
the CFC that were previously included in the 10-percent U.S. 
shareholder's income under subpart F.\1437\ Any income 
inclusion (under section 956) resulting from investments in 
U.S. property may also be excluded from the 10-percent U.S. 
shareholder's income when such earnings are ultimately 
distributed.\1438\ Ordering rules provide that distributions 
from a CFC are treated as coming first out of earnings and 
profits of the CFC that have been previously taxed under 
subpart F, then out of other earnings and profits.\1439\
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    \1437\Sec. 959(a)(1).
    \1438\Sec. 959(a)(2).
    \1439\Sec. 959(c).
---------------------------------------------------------------------------
Basis adjustments
      In general, a 10-percent U.S. shareholder of a CFC 
receives a basis increase with respect to its stock in the CFC 
equal to the amount of the CFC's earnings that are included in 
the 10-percent U.S. shareholder's income under subpart F.\1440\ 
Similarly, a 10-percent U.S. shareholder of a CFC generally 
reduces its basis in the CFC's stock in an amount equal to any 
distributions that the 10-percent U.S. shareholder receives 
from the CFC that are excluded from its income as previously 
taxed under subpart F.\1441\
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    \1440\Sec. 961(a).
    \1441\Sec. 961(b).
---------------------------------------------------------------------------
Passive foreign investment companies
      The Tax Reform Act of 1986\1442\ established the PFIC 
anti-deferral regime. A PFIC is generally defined as any 
foreign corporation if 75 percent or more of its gross income 
for the taxable year consists of passive income, or 50 percent 
or more of its assets consists of assets that produce, or are 
held for the production of, passive income.\1443\ Alternative 
sets of income inclusion rules apply to U.S. persons that are 
shareholders in a PFIC, regardless of their percentage 
ownership in the company. One set of rules applies to PFICs 
that are qualified electing funds, under which electing U.S. 
shareholders currently include in gross income their respective 
shares of the company's earnings, with a separate election to 
defer payment of tax, subject to an interest charge, on income 
not currently received.\1444\ A second set of rules applies to 
PFICs that are not qualified electing funds, under which U.S. 
shareholders pay tax on certain income or gain realized through 
the company, plus an interest charge that is attributable to 
the value of deferral.\1445\ A third set of rules applies to 
PFIC stock that is marketable, under which electing U.S. 
shareholders currently take into account as income (or loss) 
the difference between the fair market value of the stock as of 
the close of the taxable year and their adjusted basis in such 
stock (subject to certain limitations), often referred to as 
``marking to market.''\1446\
---------------------------------------------------------------------------
    \1442\Pub. L. No. 99-514.
    \1443\Sec. 1297.
    \1444\Secs. 1293-1295.
    \1445\Sec. 1291.
    \1446\Sec. 1296.
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      Under the PFIC regime, passive income is any income which 
is of a kind that would be foreign personal holding company 
income, including dividends, interest, royalties, rents, and 
certain gains on the sale or exchange of property, commodities, 
or foreign currency. However, among other exceptions, passive 
income does not include any income derived in the active 
conduct of an insurance business by a corporation that is 
predominantly engaged in an insurance business and that would 
be subject to tax under subchapter L if it were a domestic 
corporation.\1447\ In applying the insurance exception, the IRS 
analyzes whether risks assumed under contracts issued by a 
foreign company organized as an insurer are truly insurance 
risks, whether the risks are limited under the terms of the 
contracts, and the status of the company as an insurance 
company.\1448\
---------------------------------------------------------------------------
    \1447\Sec. 1297(b)(2)(B).
    \1448\Notice 2003-34, 2003-C.B. 1 990, June 9, 2003. See also, 
Prop. Treas. Reg. sec. 1.1297-4, 26 CFR Part 1, REG-108214-15, April 
24, 2015.
---------------------------------------------------------------------------
Other anti-deferral rules
      The subpart F and PFIC rules are not the only anti-
deferral regimes. Other rules that impose current U.S. taxation 
on income earned through corporations include the accumulated 
earnings tax rules\1449\ and the personal holding company 
rules.
---------------------------------------------------------------------------
    \1449\Secs. 531-537.
---------------------------------------------------------------------------
      Rules for coordination among the anti-deferral regimes 
are provided to prevent U.S. persons from being subject to U.S. 
tax on the same item of income under multiple regimes. For 
example, a corporation generally is not treated as a PFIC with 
respect to a particular shareholder if the corporation is also 
a CFC and the shareholder is a 10-percent U.S. shareholder. 
Thus, subpart F is allowed to trump the PFIC rules.
3. Foreign tax credit
      Subject to certain limitations, U.S. citizens, resident 
individuals, and domestic corporations are allowed to claim 
credit for foreign income taxes they pay. A domestic 
corporation that owns at least 10 percent of the voting stock 
of a foreign corporation is allowed a ``deemed-paid'' credit 
for foreign income taxes paid by the foreign corporation that 
the domestic corporation is deemed to have paid when the 
related income is distributed as a dividend or is included in 
the domestic corporation's income under the anti-deferral 
rules.\1450\
---------------------------------------------------------------------------
    \1450\Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------
      The foreign tax credit generally is limited to a 
taxpayer's U.S. tax liability on its foreign-source taxable 
income (as determined under U.S. tax accounting principles). 
This limit is intended to ensure that the credit serves its 
purpose of mitigating double taxation of foreign-source income 
without offsetting U.S. tax on U.S.-source income.\1451\ The 
limit is computed by multiplying a taxpayer's total U.S. tax 
liability for the year by the ratio of the taxpayer's foreign-
source taxable income for the year to the taxpayer's total 
taxable income for the year. If the total amount of foreign 
income taxes paid and deemed paid for the year exceeds the 
taxpayer's foreign tax credit limitation for the year, the 
taxpayer may carry back the excess foreign taxes to the 
previous year or carry forward the excess taxes to one of the 
succeeding 10 years.\1452\
---------------------------------------------------------------------------
    \1451\Secs. 901, 904.
    \1452\Sec. 904(c).
---------------------------------------------------------------------------
      The computation of the foreign tax credit limitation 
requires a taxpayer to determine the amount of its taxable 
income from foreign sources in each limitation category 
(described below) by allocating and apportioning deductions 
between U.S.-source gross income, on the one hand, and foreign-
source gross income in each limitation category, on the other. 
In general, deductions are allocated and apportioned to the 
gross income to which the deductions factually relate.\1453\ 
However, subject to certain exceptions, deductions for interest 
expense and research and experimental expenses are apportioned 
based on taxpayer ratios.\1454\ In the case of interest 
expense, this ratio is the ratio of the corporation's foreign 
or domestic (as applicable) assets to its worldwide assets. In 
the case of research and experimental expenses, the 
apportionment ratio is based on either sales or gross income. 
All members of an affiliated group of corporations generally 
are treated as a single corporation for purposes of determining 
the apportionment ratios.\1455\
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    \1453\Treas. Reg. sec. 1.861-8(b), Temp. Treas. Reg. sec. 1.861-
8T(c).
    \1454\Temp. Treas. Reg. sec. 1.861-9T, Treas. Reg. sec. 1.861-17.
    \1455\Sec. 864(e)(1), (6); Temp. Treas. Reg. sec. 1.861-14T(e)(2).
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      The term ``affiliated group'' is determined generally by 
reference to the rules for determining whether corporations are 
eligible to file consolidated returns.\1456\ These rules 
exclude foreign corporations from an affiliated group.\1457\ 
Interest expense allocation rules permitting a U.S. affiliated 
group to apportion the interest expense of the members of the 
U.S. affiliated group on a worldwide-group basis were modified 
in 2004, and initially effective for taxable years beginning 
after December 31, 2008.\1458\ The effective date of the 
modified rules has been delayed to January 1, 2021.\1459\ A 
result of this rule is that interest expense of foreign members 
of a U.S. affiliated group is taken into account in determining 
whether a portion of the interest expense of the domestic 
members of the group must be allocated to foreign-source 
income. An allocation to foreign-source income generally is 
required only if, in broad terms, the domestic members of the 
group are more highly leveraged than is the entire worldwide 
group. The new rules are generally expected to reduce the 
amount of the U.S. group's interest expense that is allocated 
to foreign-source income.
---------------------------------------------------------------------------
    \1456\Secs. 864(e)(5), 1504.
    \1457\Sec. 1504(b)(3).
    \1458\Sec. 864(f); ``American Jobs Creation Act of 2004'' 
(``AJCA''), Pub. L. 108-357, sec. 401(a).
    \1459\Hiring Incentives to Restore Employment Act, Pub. L. No. 111-
147, sec. 551(a).
---------------------------------------------------------------------------
      The foreign tax credit limitation is applied separately 
to passive category income and to general category 
income.\1460\ Passive category income includes passive income, 
such as portfolio interest and dividend income, and certain 
specified types of income. All other income is in the general 
category. Passive income is treated as general category income 
if it is earned by a qualifying financial services entity. 
Passive income is also treated as general category income if it 
is highly taxed (that is, if the foreign tax rate is determined 
to exceed the highest rate of tax specified in Code section 1 
or 11, as applicable). Dividends (and subpart F inclusions), 
interest, rents, and royalties received by a 10-percent U.S. 
shareholder from a CFC are assigned to a separate limitation 
category by reference to the category of income out of which 
the dividends or other payments were made.\1461\ Dividends 
received by a 10-percent corporate shareholder of a foreign 
corporation that is not a CFC are also categorized on a look-
through basis.\1462\
---------------------------------------------------------------------------
    \1460\Sec. 904(d). AJCA generally reduced the number of income 
categories from nine to two, effective for tax years beginning in 2006. 
Before AJCA, the foreign tax credit limitation was applied separately 
to the following categories of income: (1) passive income, (2) high 
withholding tax interest, (3) financial services income, (4) shipping 
income, (5) certain dividends received from noncontrolled section 902 
foreign corporations (also known as ``10/50 companies''), (6) certain 
dividends from a domestic international sales corporation or former 
domestic international sales corporation, (7) taxable income 
attributable to certain foreign trade income, (8) certain distributions 
from a foreign sales corporation or former foreign sales corporation, 
and (9) any other income not described in items (1) through (8) (so-
called ``general basket'' income). A number of other provisions of the 
Code, including several enacted in 2010 as part of Pub. L. No. 111-226, 
create additional separate categories in specific circumstances or 
limit the availability of the foreign tax credit in other ways. See, 
e.g., secs. 865(h), 901(j), 904(d)(6), 904(h)(10).
    \1461\Sec. 904(d)(3). The subpart F rules applicable to CFCs and 
their 10-percent U.S. shareholders are described below.
    \1462\Sec. 904(d)(4).
---------------------------------------------------------------------------
      Special rules apply to the allocation of income and 
losses from foreign and U.S. sources within each category of 
income.\1463\ Foreign losses from one category will first be 
used to offset income from foreign sources of other categories. 
If there remains an overall foreign loss, it will be deducted 
against income from U.S. sources. The same principle applies to 
losses from U.S. sources. In subsequent years, the losses that 
were deducted against another category or source of income will 
be recaptured. That is, an equal amount of income from the same 
category or source that generated a loss in the prior year will 
be recharacterized as income from the other category or source 
against which the loss was deducted. Up to 50 percent of income 
from one source in any subsequent year will be recharacterized 
as income from the other source, whereas foreign-source income 
in a particular category can be fully recharacterized as income 
in another category until the losses from prior years are fully 
recaptured.\1464\
---------------------------------------------------------------------------
    \1463\Secs. 904(f), (g).
    \1464\Secs. 904(f)(1), (g)(1).
---------------------------------------------------------------------------
      In addition to the foreign tax credit limitation just 
described, a taxpayer's ability to claim a foreign tax credit 
may be further limited by a matching rule that prevents the 
separation of creditable foreign taxes from the associated 
foreign income. Under this rule, a foreign tax generally is not 
taken into account for U.S. tax purposes, and thus no foreign 
tax credit is available with respect to that foreign tax, until 
the taxable year in which the related income is taken into 
account for U.S. tax purposes.\1465\
---------------------------------------------------------------------------
    \1465\Sec. 909.
---------------------------------------------------------------------------
4. Special rules
            Dual consolidated loss rules
      Under the rules applicable to corporations filing 
consolidated returns, a dual consolidated loss (``DCL'') is any 
net operating loss of a domestic corporation if the corporation 
is subject to an income tax of a foreign country without regard 
to whether such income is from sources in or outside of such 
foreign country, or if the corporation is subject to such a tax 
on a residence basis (a ``dual resident corporation'').\1466\ A 
DCL generally cannot be used to reduce the taxable income of 
any member of the corporation's affiliated group. Losses of a 
separate unit of a domestic corporation (a foreign branch or an 
interest in a hybrid entity owned by the corporation) are 
subject to this limitation in the same manner as if the unit 
were a wholly owned subsidiary of such corporation. An 
exemption is available under Treasury regulations in the case 
of DCLs for which a domestic use election (that is, an election 
to use the loss only for domestic, and not foreign, tax 
purposes) has been made.\1467\ Recapture is required, however, 
upon the occurrence of certain triggering events, including the 
conversion of a separate unit to a foreign corporation and the 
transfer of 50 percent or more of the assets of a separate unit 
within a twelve-month period.\1468\
---------------------------------------------------------------------------
    \1466\Sec. 1503(d).
    \1467\Treas. Reg. sec. 1.1503(d)-6(d).
    \1468\See Treas. Reg. sec. 1.1503(d)-6(e)(1).
---------------------------------------------------------------------------
            Temporary dividends-received deduction for repatriated 
                    foreign earnings
      AJCA section 421 added to the Code section 965, a 
temporary provision intended to encourage U.S. multinational 
companies to repatriate foreign earnings. Under section 965, 
for one taxable year certain dividends received by a U.S. 
corporation from its CFCs were eligible for an 85-percent 
dividends-received deduction. At the taxpayer's election, this 
deduction was available for dividends received either during 
the taxpayer's first taxable year beginning on or after October 
22, 2004, or during the taxpayer's last taxable year beginning 
before such date.
      The temporary deduction was subject to a number of 
general limitations. First, it applied only to cash 
repatriations generally in excess of the taxpayer's average 
repatriation level calculated for a three-year base period 
preceding the year of the deduction. Second, the amount of 
dividends eligible for the deduction was generally limited to 
the amount of earnings shown as permanently invested outside 
the United States on the taxpayer's recent audited financial 
statements. Third, to qualify for the deduction, dividends were 
required to be invested in the United States according to a 
domestic reinvestment plan approved by the taxpayer's senior 
management and board of directors.\1469\
---------------------------------------------------------------------------
    \1469\Section 965(b)(4). The plan was required to provide for the 
reinvestment of the repatriated dividends in the United States, 
including as a source for the funding of worker hiring and training, 
infrastructure, research and development, capital investments, and the 
financial stabilization of the corporation for the purposes of job 
retention or creation.
---------------------------------------------------------------------------
      No foreign tax credit (or deduction) was allowed for 
foreign taxes attributable to the deductible portion of any 
dividend.\1470\ For this purpose, the taxpayer was permitted to 
specifically identify which dividends were treated as carrying 
the deduction and which dividends were not. In other words, the 
taxpayer was allowed to choose which of its dividends were 
treated as meeting the base-period repatriation level (and thus 
carry foreign tax credits, to the extent otherwise allowable), 
and which of its dividends were treated as part of the excess 
eligible for the deduction (and thus subject to proportional 
disallowance of any associated foreign tax credits).\1471\ 
Deductions were disallowed for expenses that were directly 
allocable to the deductible portion of any dividend.\1472\
---------------------------------------------------------------------------
    \1470\Sec. 965(d)(1).
    \1471\Accordingly, taxpayers generally were expected to pay regular 
dividends out of high-taxed CFC earnings (thereby generating deemed-
paid credits available to offset foreign-source income) and section 965 
dividends out of low-taxed CFC earnings (thereby availing themselves of 
the 85-percent deduction).
    \1472\Sec. 965(d)(2).
---------------------------------------------------------------------------
            Domestic international sales corporations
      A domestic international sales corporations (``DISC'') is 
a domestic corporation that satisfies the following conditions: 
95 percent of its gross receipts must be qualified export 
receipts; 95 percent of the sum of the adjusted bases of all 
its assets must be attributable to the sum of the adjusted 
bases of qualified export assets; the corporation must have no 
more than one class of stock; the par or stated value of the 
outstanding stock must be at least $2,500 on each day of the 
taxable year; and an election must be in effect to be taxed as 
a DISC.\1473\ In general, a DISC is not subject to corporate-
level tax and offers limited deferral of tax liability to its 
shareholders.\1474\ DISC income attributable to a maximum of 
$10 million annually of qualified export receipts is generally 
exempt from income tax at both the corporate and shareholder 
level. Shareholders must pay interest to account for the 
benefit of deferring the tax liability on undistributed DISC 
income related to this $10 million maximum annual amount.\1475\ 
Such entities are also referred to as interest charge DISCs, or 
IC-DISCs. Shareholders of a DISC are deemed to receive a 
dividend out of current earnings and profits from qualified 
export receipts in excess of $10 million.\1476\ Gain on the 
sale of DISC stock is treated as a dividend to the extent of 
accumulated DISC income.\1477\ The shareholders of a 
corporation which is not a DISC, but was a DISC in a previous 
taxable year, and which has previously taxed income or 
accumulated DISC income, are also required to pay interest on 
the deferral benefit, and gain on the sale or exchange of stock 
in such corporation is treated as a dividend.
---------------------------------------------------------------------------
    \1473\Secs. 992(a) and (b). If a corporation fails to satisfy 
either or both of the 95-percent tests, it is deemed to satisfy such 
tests if it makes a pro rata distribution of its gross receipts which 
are not qualified export receipts and the fair market value of its 
assets which are not qualified export assets. Sec. 992(c).
    \1474\Sec. 991. Prior to the 1984 Revenue Act (Pub. L. 98-369), 
DISCs were eligible for more generous tax benefits that were eliminated 
in favor of the since-repealed foreign sales corporation regime 
(``FSC''). An overview of the history of the DISCs and FSCs regimes is 
provided in Joseph Isenbergh, Vol. 3 U.S. Taxation of Foreign Persons 
and Foreign Income, Para. 81. (Fourth Ed. 2016).
    \1475\The rate is the average of one-year constant maturity 
Treasury yields. The deferral benefit is the excess of the amount of 
tax for which the shareholder would be liable if deferred DISC income 
were included as ordinary income over the actual tax liability of such 
shareholder. Sec. 995(f).
    \1476\The amount of the deemed distribution is the sum of several 
items, including qualified export receipts in excess of $10 million. 
See sec. 955(b).
    \1477\Sec. 995(c).
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                      INTERNATIONAL TAX PROVISIONS

  A. Establishment of Participation Exemption System for Taxation of 
                             Foreign Income

1. Deduction for foreign-source portion of dividends received by 
        domestic corporations from specified 10-percent owned foreign 
        corporations (sec. 4001 of the House bill, sec. 14101 of the 
        Senate amendment, and new sec. 245A of the Code)

                               HOUSE BILL

In general
      The provision generally establishes a participation 
exemption system for foreign income. This exemption is provided 
for by means of a 100-percent deduction for the foreign-source 
portion of dividends received from specified 10-percent owned 
foreign corporations by domestic corporations that are United 
States shareholders of those foreign corporations within the 
meaning of section 951(b) (referred to here as ``participation 
DRD'').\1478\
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    \1478\Under section 951(b), a domestic corporation is a United 
States shareholder of a foreign corporation if it owns, within the 
meaning of section 958(a), or is considered as owning by applying the 
rules of section 958(b), 10 percent or more of the voting stock of the 
foreign corporation.
---------------------------------------------------------------------------
      A specified 10-percent owned foreign corporation is any 
foreign corporation with respect to which any domestic 
corporation is a United States shareholder. The phrase does not 
include a passive foreign investment company within the meaning 
of subpart D of part VI of subchapter P.
      The term ``dividend received'' is intended to be 
interpreted broadly, consistently with the meaning of the 
phrases ``amount received as dividends'' and ``dividends 
received'' under sections 243 and 245, respectively.\1479\ 
Under proposed section 245A(e), the Secretary of the Treasury 
may prescribe such regulations or other guidance as may be 
necessary or appropriate to carry out the rules of section 
245A, including clarifying the intended broad scope of the term 
``dividend received.''
---------------------------------------------------------------------------
    \1479\Consequently, for example, gain included in gross income as a 
dividend under section 1248(a) or 964(e) would constitute a dividend 
received for which the deduction under section 245A may be available.
---------------------------------------------------------------------------
      For example, if a domestic corporation indirectly owns 
stock of a foreign corporation through a foreign partnership 
and the domestic corporation would qualify for the 
participation DRD with respect to dividends from the foreign 
corporation if the domestic corporation owned such stock 
directly, the domestic corporation would be allowed a 
participation DRD with respect to its distributive share of the 
partnership's dividend from the foreign corporation.
Foreign-source portion of a dividend
      The participation DRD is available only for the foreign-
source portion of dividends received from specified 10-percent 
owned foreign corporations. The foreign-source portion of any 
dividend is the amount that bears the same ratio to the 
dividend as the specified foreign corporation's post-1986 
undistributed foreign earnings bears to the corporation's total 
post-1986 undistributed earnings. Post-1986 undistributed 
earnings are the amount of the earnings and profits of a 
specified 10-percent owned foreign corporation accumulated in 
taxable years beginning after December 31, 1986, as of the 
close of the taxable year of the foreign corporation in which 
the dividend is distributed and not reduced by dividends\1480\ 
distributed during that year. Post-1986 undistributed foreign 
earnings are, in general, the portion of post-1986 
undistributed earnings that is not attributable to post-1986 
undistributed U.S. earnings. Post-1986 undistributed U.S. 
earnings are, in general, undistributed earnings attributable 
to: (a) the corporation's income that is effectively connected 
with the conduct of a trade or business within the United 
States, or (b) any dividend received (directly or through a 
wholly owned foreign corporation) from an 80-percent-owned (by 
vote or value) domestic corporation.
---------------------------------------------------------------------------
    \1480\Pursuant to section 959(d), a distribution of previously 
taxed income does not constitute a dividend even if it reduces earnings 
and profits.
---------------------------------------------------------------------------
      Rules similar to the rules described above apply when a 
dividend is paid out of earnings and profits of a specified 10-
percent owned foreign corporation accumulated in taxable years 
beginning before January 1, 1987. As a consequence, the 
participation exemption system is available for both post-1986 
and pre-1987 foreign earnings. An ordering rule provides that 
dividends are treated as first being paid out of post-1986 
undistributed earnings to the extent of those earnings.
      An additional rule provides for the treatment of 
distributions of a specified 10-percent owned foreign 
corporation in excess of undistributed earnings. Under section 
316(a)(2), a distribution of earnings and profits of a 
corporation in the taxable year of the distribution is treated 
as a dividend even if the distribution exceeds accumulated 
earnings and profits.\1481\ The determination of the foreign-
source portion of such a distribution is calculated in a 
similar manner as for other types of dividends.
---------------------------------------------------------------------------
    \1481\Called a ``nimble dividend.'' See, Boris I. Bittker and James 
S. Eustice, Federal Income Taxation of Corporations and Shareholders, 
(7th ed. 2016) para. 8-12.
---------------------------------------------------------------------------
Foreign tax credit disallowance; foreign tax credit limitation
      No foreign tax credit or deduction is allowed for any 
taxes (including withholding taxes) paid or accrued with 
respect to a dividend that qualifies for the participation DRD.
      For purposes of computing the section 904(a) foreign tax 
credit limitation, a domestic corporation that is a United 
States shareholder of a specified 10-percent owned foreign 
corporation must compute its foreign-source taxable income (and 
entire taxable income) by disregarding the foreign-source 
portion of any dividend received from that foreign corporation 
for which the participation DRD is taken, as well as and any 
deductions properly allocable or apportioned to that foreign-
source portion or the stock with respect to which it is paid.
Six-month holding period requirement
      A domestic corporation is not permitted a participation 
DRD in respect of any dividend on any share of stock that is 
held by the domestic corporation for 180 days or less during 
the 361-day period beginning on the date that is 180 days 
before the date on which the share becomes ex-dividend with 
respect to the dividend. For this purpose, a domestic 
corporation is treated as holding a share of stock for any 
period only if the corporation is a specified 10-percent owned 
foreign corporation and the taxpayer is a United States 
shareholder with respect to such corporation during that 
period.
      Effective date.--The provision applies to distributions 
made (and for purposes of determining a taxpayer's foreign tax 
credit limitation under section 904, deductions in taxable 
years beginning) after December 31, 2017.

                            SENATE AMENDMENT

In general
      The provision allows an exemption for certain foreign 
income. This exemption is provided for by means of a 100-
percent deduction for the foreign-source portion of dividends 
received from specified 10-percent owned foreign corporations 
by domestic corporations that are United States shareholders of 
those foreign corporations within the meaning of section 
951(b)\1482\ (referred to here as ``DRD'').
---------------------------------------------------------------------------
    \1482\Under section 951(b), a domestic corporation is a United 
States shareholder of a foreign corporation if it owns, within the 
meaning of section 958(a), or is considered as owning by applying the 
rules of section 958(b), 10-percent or more of the voting stock of the 
foreign corporation.
---------------------------------------------------------------------------
      A specified 10-percent owned foreign corporation is any 
foreign corporation (other than a PFIC that is not also a CFC) 
with respect to which any domestic corporation is a U.S. 
shareholder.\1483\
---------------------------------------------------------------------------
    \1483\Secs. 1297, 1298.
---------------------------------------------------------------------------
Foreign-source portion of a dividend
      The DRD is available only for the foreign-source portion 
of dividends received by a domestic corporation from specified 
10-percent owned foreign corporations. The foreign-source 
portion of any dividend is the amount that bears the same ratio 
to the dividend as the undistributed foreign earnings bears to 
the total undistributed earnings of the foreign corporation. 
Undistributed earnings are the amount of the earnings and 
profits of a specified 10-percent owned foreign 
corporation\1484\ as of the close of the taxable year of the 
specified 10-percent owned foreign corporation in which the 
dividend is distributed and not reduced by dividends\1485\ 
distributed during that taxable year. Undistributed foreign 
earnings are the portion of the undistributed earnings 
attributable to neither income described in section 
245(a)(5)(A) nor section 245(a)(5)(B), without regard to 
section 245(a)(12).
---------------------------------------------------------------------------
    \1484\Computed in accordance with secs. 964(a) and 986.
    \1485\Pursuant to section 959(d), a distribution of previously 
taxed income does not constitute a dividend even if it reduces earnings 
and profits.
---------------------------------------------------------------------------
Hybrid Dividends
      The DRD is not available for any dividend received by a 
U.S. shareholder from a controlled foreign corporation if the 
dividend is a hybrid dividend. A hybrid dividend is an amount 
received from a controlled foreign corporation for which a 
deduction would be allowed under this provision and for which 
the specified 10-percent owned foreign corporation received a 
deduction (or other tax benefit) from taxes imposed by a 
foreign country.
      If a controlled foreign corporation with respect to which 
a domestic corporation is a U.S. shareholder receives a hybrid 
dividend from any other controlled foreign corporation with 
respect to which the domestic corporation is also a U.S. 
shareholder, then the hybrid dividend is treated for purposes 
of section 951(a)(1)(A) as subpart F income of the recipient 
controlled foreign corporation for the taxable year of the 
controlled foreign corporation in which the dividends was 
received and the U.S. shareholder includes in gross income an 
amount equal to the shareholder's pro rata share of the subpart 
F income, determined in the same manner as section 951(a)(2).
Foreign tax credit disallowance
      No foreign tax credit or deduction is allowed for any 
taxes paid or accrued with respect to a dividend that qualifies 
for the DRD.
      For purposes of computing the section 904(a) foreign tax 
credit limitation, a domestic corporation that is a U.S. 
shareholder of a specified 10-percent owned foreign corporation 
must compute its foreign-source taxable income by disregarding 
the foreign-source portion of any dividend received from that 
foreign corporation for which the DRD is taken, and any 
deductions properly allocable or apportioned to that foreign-
source portion or the stock with respect to which it is paid.
Holding period requirement
      A domestic corporation is not permitted a DRD in respect 
of any dividend on any share of stock that is held by the 
domestic corporation for 365 days or less during the 731-day 
period beginning on the date that is 365 days before the date 
on which the share becomes ex-dividend with respect to the 
dividend. For this purpose, the holding period requirement is 
treated as met only if the specified 10-percent owned foreign 
corporation is a specified 10-percent owned foreign corporation 
at all times during the period and the taxpayer is a U.S. 
shareholder with respect to such specified 10-percent owned 
foreign corporation at all times during the period.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders in which or 
with which such taxable years of foreign corporations end.

                          CONFERENCE AGREEMENT

In general
      The provision in the conference agreement generally 
follows the provision in the Senate amendment, with some 
changes, as described below, and allows an exemption for 
certain foreign income by means of a 100-percent deduction for 
the foreign-source portion of dividends received from specified 
10-percent owned foreign corporations by domestic 
corporations\1486\ that are United States shareholders of those 
foreign corporations within the meaning of section 951(b)\1487\ 
(referred to here, as above, as ``DRD'').
---------------------------------------------------------------------------
    \1486\Including a controlled foreign corporation treated as a 
domestic corporation for purposes of computing the taxable income 
thereof. See Treas. Reg. sec. 1.952-2(b)(1). Therefore, a CFC receiving 
a dividend from a 10-percent owned foreign corporation that constitutes 
subpart F income may be eligible for the DRD with respect to such 
income.
    \1487\Under section 951(b) as revised by the Act, a domestic 
corporation is a United States shareholder of a foreign corporation if 
it owns, within the meaning of section 958(a), or is considered as 
owning by applying the rules of section 958(b), 10-percent or more of 
the vote or value of the foreign corporation.
---------------------------------------------------------------------------
      A specified 10-percent owned foreign corporation is any 
foreign corporation (other than a PFIC that is not also a CFC) 
with respect to which any domestic corporation is a U.S. 
shareholder.\1488\
---------------------------------------------------------------------------
    \1488\Secs. 1297, 1298.
---------------------------------------------------------------------------
      The term ``dividend received'' is intended to be 
interpreted broadly, consistently with the meaning of the 
phrases ``amount received as dividends'' and ``dividends 
received'' under sections 243 and 245, respectively. For 
example, if a domestic corporation indirectly owns stock of a 
foreign corporation through a partnership and the domestic 
corporation would qualify for the participation DRD with 
respect to dividends from the foreign corporation if the 
domestic corporation owned such stock directly, the domestic 
corporation would be allowed a participation DRD with respect 
to its distributive share of the partnership's dividend from 
the foreign corporation.
      The DRD is available only to C corporations that are not 
RICs or REITs.
Foreign-source portion of a dividend
      The DRD is available only for the foreign-source portion 
of dividends received by a domestic corporation from specified 
10-percent owned foreign corporations. The foreign-source 
portion of any dividend is the amount that bears the same ratio 
to the dividend as the undistributed foreign earnings bears to 
the total undistributed earnings of the foreign corporation. 
Undistributed earnings are the amount of the earnings and 
profits of a specified 10-percent owned foreign 
corporation\1489\ as of the close of the taxable year of the 
specified 10-percent owned foreign corporation in which the 
dividend is distributed and not reduced by dividends\1490\ 
distributed during that taxable year. Undistributed foreign 
earnings are the portion of the undistributed earnings 
attributable to neither income described in section 
245(a)(5)(A) nor section 245(a)(5)(B), without regard to 
section 245(a)(12).
---------------------------------------------------------------------------
    \1489\Computed in accordance with secs. 964(a) and 986.
    \1490\Pursuant to section 959(d), a distribution of previously 
taxed income does not constitute a dividend even if it reduces earnings 
and profits.
---------------------------------------------------------------------------
Hybrid dividends
      The DRD is not available for any dividend received by a 
U.S. shareholder from a controlled foreign corporation if the 
dividend is a hybrid dividend. A hybrid dividend is an amount 
received from a controlled foreign corporation for which a 
deduction would be allowed under this provision and for which 
the specified 10-percent owned foreign corporation received a 
deduction (or other tax benefit) with respect to any income, 
war profits, and excess profits taxes imposed by any foreign 
country.
      If a controlled foreign corporation with respect to which 
a domestic corporation is a U.S. shareholder receives a hybrid 
dividend from any other controlled foreign corporation with 
respect to which the domestic corporation is also a U.S. 
shareholder, then the hybrid dividend is treated for purposes 
of section 951(a)(1)(A) as subpart F income of the recipient 
controlled foreign corporation (notwithstanding section 
954(c)(6)) for the taxable year of the controlled foreign 
corporation in which the dividends was received and the U.S. 
shareholder includes in gross income an amount equal to the 
shareholder's pro rata share of the subpart F income, 
determined in the same manner as section 951(a)(2).
Foreign tax credit disallowance
      No foreign tax credit or deduction is allowed for any 
taxes paid or accrued with respect to any portion of a 
distribution treated as a dividend that qualifies for the DRD.
      For purposes of computing the section 904(a) foreign tax 
credit limitation, a domestic corporation that is a U.S. 
shareholder of a specified 10-percent owned foreign corporation 
must compute its foreign-source taxable income (and entire 
taxable income) by disregarding the foreign-source portion of 
any dividend received from that foreign corporation for which 
the DRD is taken, and any deductions properly allocable or 
apportioned to that foreign-source portion or the stock with 
respect to which it is paid.
Holding period requirement
      A domestic corporation is not permitted a DRD in respect 
of any dividend on any share of stock that is held by the 
domestic corporation for 365 days or less during the 731-day 
period beginning on the date that is 365 days before the date 
on which the share becomes ex-dividend with respect to the 
dividend. For this purpose, the holding period requirement is 
treated as met only if the specified 10-percent owned foreign 
corporation is a specified 10-percent owned foreign corporation 
at all times during the period and the taxpayer is a U.S. 
shareholder with respect to such specified 10-percent owned 
foreign corporation at all times during the period.
      Effective date.--The provision applies to distributions 
made (and for purposes of determining a taxpayer's foreign tax 
credit limitation under section 904, deductions in taxable 
years beginning) after December 31, 2017.
2. Modification of subpart F inclusion for increased investments in 
        United States property (sec. 4002 of the House bill, sec. 14218 
        of the Senate amendment, and sec. 956 of the Code)

                               HOUSE BILL

      Under the provision, the amount determined under section 
956 (relating to CFC investments in United States property) 
with respect to a domestic corporation is zero. A similar rule 
is intended for domestic corporations that own a CFC through a 
domestic partnership. The provision includes a specific grant 
of authority to the Secretary to issue regulations to effect 
that intent.
      Effective date.--The provision applies to taxable years 
of foreign corporations beginning after December 31, 2017.

                            SENATE AMENDMENT

      The provision excepts domestic corporations that are U.S. 
shareholders in the CFC from the requirement that they 
recognize income when the CFC increases its investment in U.S. 
property.
      Effective date.--The provision applies to taxable years 
of foreign corporations beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement does not follow the House bill 
or the Senate amendment.
3. Special rules relating to sales or transfers involving specified 10-
        percent owned foreign corporations (sec. 4003 of the House 
        bill, sec. 14102 of the Senate Amendment and secs. 
        367(a)(3)(C), 961, 1248 and new sec. 91 of the Code)

                               HOUSE BILL

Reduction in basis of certain foreign stock
      Solely for the purpose of determining a loss, a domestic 
corporate shareholder's adjusted basis in the stock of a 
specified 10-percent owned foreign corporation (as defined in 
new section 245A) is reduced by an amount equal to the portion 
of any dividend received with respect to such stock from such 
foreign corporation that was not taxed by reason of a dividends 
received deduction allowable under section 245A in any taxable 
year of such domestic corporation. This rule applies in 
coordination with section 1059, such that any reduction in 
basis required pursuant to this provision will be disregarded, 
to the extent the basis in the 10-percent owned foreign 
corporation's stock has already been reduced pursuant to 
section 1059.
Inclusion of transferred loss amount in certain assets transfers
      Under the provision, if a domestic corporation transfers 
substantially all of the assets of a foreign branch (within the 
meaning of section 367(a)(3)(C)) to a foreign corporation 
which, after such transfer, is a specified 10-percent owned 
foreign corporation with respect to which the domestic 
corporation is a United States shareholder, the domestic 
corporation includes in gross income an amount equal to the 
transferred loss amount, subject to certain limitations.
      The transferred loss amount is the excess of: (1) losses 
incurred by the foreign branch after December 31, 2017 for 
which a deduction was allowed to the domestic corporation, over 
(2) the sum of taxable income earned by the foreign branch and 
gain recognized by reason of an overall foreign loss recapture 
arising out of disposition of assets on account of the 
underlying transfer. For the purposes of (2), only taxable 
income of the foreign branch in taxable years after the loss is 
incurred through the close of the taxable year of the transfer 
is included.
      For transfers not covered by section 367(a)(3)(C), the 
transferred loss amount is reduced by the amount of gain 
recognized by the domestic corporation on the transfer (other 
than gains recognized by reason of overall foreign loss 
recapture). For transfers covered by section 367(a)(3)(C), the 
transferred loss amount is reduced by the amount of gain 
recognized by reason of such subparagraph.
      Amounts included in gross income by reason of the 
provision or by reason of section 367(a)(3)(C) are treated as 
derived from sources within the United States.
      The provision provides authority for the Secretary of the 
Treasury to prescribe regulations or other guidance for proper 
adjustments to the adjusted basis of the specified 10-percent 
owned foreign corporation to which the transfer is made, and to 
the adjusted basis of the property transferred, to reflect 
amounts included in gross income under the provision.
      Effective date.--The provision relating to reduction of 
basis in certain foreign stock for the purposes of determining 
a loss is effective for distributions made after December 31, 
2017.
      The provision relating to transfer of loss amounts from 
foreign branches to certain foreign corporations is effective 
for transfers after December 31, 2017.

                            SENATE AMENDMENT

Sales by United States persons of stock
      In the case of the sale or exchange by a domestic 
corporation of stock in a foreign corporation held for one year 
or more, any amount received by the domestic corporation which 
is treated as a dividend for purposes of section 1248, is 
treated as a dividend for purposes of applying the provision.
Reduction in basis of certain foreign stock
      Solely for the purpose of determining a loss, a domestic 
corporate shareholder's adjusted basis in the stock of a 
specified 10-percent owned foreign corporation (as defined in 
this provision) is reduced by an amount equal to the portion of 
any dividend received with respect to such stock from such 
foreign corporation that was not taxed by reason of a dividends 
received deduction allowable under section 245A in any taxable 
year of such domestic corporation. This rule applies in 
coordination with section 1059, such that any reduction in 
basis required pursuant to this provision will be disregarded, 
to the extent the basis in the specified 10-percent owned 
foreign corporation's stock has already been reduced pursuant 
to section 1059.
Sale by a CFC of a lower-tier CFC
      If for any taxable year of a CFC beginning after December 
31, 2017, an amount is treated as a dividend under section 
964(e)(1) because of a sale or exchange by the CFC of stock in 
another foreign corporation held for a year or more, then: (i) 
the foreign-source portion of the dividend is treated as 
subpart F income of the selling CFC for purposes of section 
951(a)(1)(A), (ii) a United States shareholder with respect to 
the selling CFC includes in gross income for the taxable year 
of the shareholder with or within the taxable year of the CFC 
ends, an amount equal to the shareholder's pro rata share 
(determined in the same manner as under section 951(a)(2)) of 
the amount treated as subpart F income under (i), and (iii) the 
deduction under section 245A(a) is allowable to the United 
States shareholder with respect to the subpart F income 
included in gross income under (ii) in the same manner as if 
the subpart F income were a dividend received by the 
shareholder from the selling CFC.
      In the case of a sale or exchange by a CFC of stock in 
another corporation in a taxable year of the selling CFC 
beginning after December 31, 2017, to which this provision 
applies if gain were recognized, rules similar to those in 
section 961(d) apply.
Inclusion of transferred loss amount in certain assets transfers
      Under the provision, if a domestic corporation transfers 
substantially all of the assets of a foreign branch (within the 
meaning of section 367(a)(3)(C) as in effect before the date of 
enactment of TCJA) to a specified 10-percent owned foreign 
corporation with respect to which it is a U.S. shareholder 
after the transfer, the domestic corporation includes in gross 
income an amount equal to the transferred loss amount, subject 
to certain limitations.
      The transferred loss amount is the excess (if any) of: 
(1) losses incurred by the foreign branch after December 31, 
2017, and before the transfer, for which a deduction was 
allowed to the domestic corporation, over (2) the sum of 
certain taxable income earned by the foreign branch and gain 
recognized by reason of an overall foreign loss recapture 
arising out of disposition of assets on account of the 
underlying transfer. For the purposes of (2), only taxable 
income of the foreign branch in taxable years after the loss is 
incurred through the close of the taxable year of the transfer, 
is included. The transferred loss amount is reduced by the 
amount of gain recognized by the taxpayer (other than gain 
recognized by reason of an overall foreign loss recapture) on 
account of the transfer.
      The amount of loss included in the gross income of the 
taxpayer under the proposed rule above for any taxable year 
cannot exceed the amount allowed as a deduction under new 
section 245A for the taxable year (taking into account 
dividends received from all specified 10-percent owned foreign 
corporations with respect to which the taxpayer is a U.S. 
shareholder). Any amount not included in gross income for a 
taxable year because of this proposed rule is included in gross 
income in the succeeding taxable year.
      Amounts included in gross income by reason of the 
provision are treated as derived from sources within the United 
States. Consistent with regulations or guidance that the 
Secretary of the Treasury may prescribe, proper adjustments are 
made in the adjusted basis of the taxpayer's stock in the 
specified 10-percent owned foreign corporation to which the 
transfer is made, and in the transferee's adjusted basis in the 
property transferred, to reflect amounts included in gross 
income under this provision.
Repeal of active trade or business exception
      Section 367 is amended to provide that in connection with 
any exchange described in section 332, 351, 354, 356, or 361, 
if a U.S. person transfers property used in the active conduct 
of a trade or business to a foreign corporation, such foreign 
corporation shall not, for purposes of determining the extent 
to which gain shall be recognized on such transfer, be 
considered to be a corporation.
      Effective date.--The provision relating to reduction of 
basis in certain foreign stock for the purposes of determining 
a loss is effective for dividends received in taxable years 
beginning after December 31, 2017.
      The provisions relating to transfer of loss amounts from 
foreign branches to certain foreign corporations and to the 
repeal of the active trade or business exception are effective 
for transfers after December 31, 2017.

                          CONFERENCE AGREEMENT

      The provision in the conference agreement retains 
elements of both the House Bill and the Senate amendment, as 
follows.
Sales by United States persons of stock
      In the case of the sale or exchange by a domestic 
corporation of stock in a foreign corporation held for one year 
or more, any amount received by the domestic corporation which 
is treated as a dividend for purposes of section 1248, is 
treated as a dividend for purposes of applying the provision.
Reduction in basis of certain foreign stock
      Solely for the purpose of determining a loss, a domestic 
corporate shareholder's adjusted basis in the stock of a 
specified 10-percent owned foreign corporation (as defined in 
this provision) is reduced by an amount equal to the portion of 
any dividend received with respect to such stock from such 
foreign corporation that was not taxed by reason of a dividends 
received deduction allowable under section 245A in any taxable 
year of such domestic corporation. This rule applies in 
coordination with section 1059, such that any reduction in 
basis required pursuant to this provision will be disregarded, 
to the extent the basis in the specified 10-percent owned 
foreign corporation's stock has already been reduced pursuant 
to section 1059.
Sale by a CFC of a lower-tier CFC
      If for any taxable year of a CFC beginning after December 
31, 2017, an amount is treated as a dividend under section 
964(e)(1) because of a sale or exchange by the CFC of stock in 
another foreign corporation held for a year or more, then: (i) 
the foreign-source portion of the dividend is treated as 
subpart F income of the selling CFC for purposes of section 
951(a)(1)(A), (ii) a United States shareholder with respect to 
the selling CFC includes in gross income for the taxable year 
of the shareholder with or within the taxable year of the CFC 
ends, an amount equal to the shareholder's pro rata share 
(determined in the same manner as under section 951(a)(2)) of 
the amount treated as subpart F income under (i), and (iii) the 
deduction under section 245A(a) is allowable to the United 
States shareholder with respect to the subpart F income 
included in gross income under (ii) in the same manner as if 
the subpart F income were a dividend received by the 
shareholder from the selling CFC.
      In the case of a sale or exchange by a CFC of stock in 
another corporation in a taxable year of the selling CFC 
beginning after December 31, 2017, to which this provision 
applies if gain were recognized, rules similar to section 
961(d) apply.
Inclusion of transferred loss amount in certain assets transfers
      Under the provision, if a domestic corporation transfers 
substantially all of the assets of a foreign branch (within the 
meaning of section 367(a)(3)(C)) as in effect before the date 
of enactment of TCJA) to a specified 10-percent owned foreign 
corporation with respect to which it is a U.S. shareholder 
after the transfer, the domestic corporation includes in gross 
income an amount equal to the transferred loss amount, subject 
to certain limitations.
      The transferred loss amount is the excess (if any) of: 
(1) losses incurred by the foreign branch after December 31, 
2017, and before the transfer, for which a deduction was 
allowed to the domestic corporation, over (2) the sum of 
certain taxable income earned by the foreign branch and gain 
recognized by reason of an overall foreign loss recapture 
arising out of disposition of assets on account of the 
underlying transfer. For the purposes of (2), only taxable 
income of the foreign branch in taxable years after the loss is 
incurred through the close of the taxable year of the transfer, 
is included. The transferred loss amount is reduced by the 
amount of gain recognized by the taxpayer (other than gain 
recognized by reason of an overall foreign loss recapture) on 
account of the transfer.
      Amounts included in gross income by reason of the 
provision are treated as derived from sources within the United 
States. Consistent with regulations or guidance that the 
Secretary of the Treasury may prescribe, proper adjustments are 
made in the adjusted basis of the taxpayer's stock in the 
specified 10-percent owned foreign corporation to which the 
transfer is made, and in the transferee's adjusted basis in the 
property transferred, to reflect amounts included in gross 
income under this provision.
      The amount of gain taken into account under this 
provision is reduced by the amount of gain which would be 
recognized under section 367(a)(3)(C) as in effect before the 
date of enactment of TCJA\1491\ with respect to losses incurred 
before January 1, 2018.
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    \1491\Determined without regard to the rule providing for proper 
adjustment of basis in the stock in the specified 10-percent owned 
foreign corporation to which the transfer is made.
---------------------------------------------------------------------------
Repeal of active trade or business exception
      Section 367 is amended to provide that in connection with 
any exchange described in section 332, 351, 354, 356, or 361, 
if a U.S. person transfers property used in the active conduct 
of a trade or business to a foreign corporation, such foreign 
corporation shall not, for purposes of determining the extent 
to which gain shall be recognized on such transfer, be 
considered to be a corporation.
      Effective date.--The provisions relating to sales or 
exchanges of stock apply to sales or exchanges after December 
31, 2017.
      The provision relating to reduction of basis in certain 
foreign stock for the purposes of determining a loss is 
effective for distributions made after December 31, 2017.
      The provisions relating to transfer of loss amounts from 
foreign branches to certain foreign corporations and to the 
repeal of the active trade or business are effective for 
transfers after December 31, 2017.
4. Treatment of deferred foreign income upon transition to 
        participation exemption system of taxation and deemed 
        repatriation at two-tier rate (sec. 4004 of the House bill, 
        sec. 14103 of the Senate amendment, and secs. 78, 904, 907 and 
        965 of the Code)

                               HOUSE BILL

In general
      The provision generally requires that, for the last 
taxable year of a foreign corporation beginning before January 
1, 2018, all U.S. shareholders of any CFC or other foreign 
corporation that is at least 10-percent U.S.-owned but not 
controlled (other than a PFIC) must include in income their pro 
rata shares of the accumulated post-1986 deferred foreign 
income that was not previously taxed. A portion of that pro 
rata share of deferred foreign income is deductible; the amount 
deductible varies depending upon whether the deferred foreign 
income is held in the form of liquid or illiquid assets. The 
deduction results in a reduced rate of tax of 14 percent for 
the included deferred foreign income held in liquid form and 7 
percent for remaining deferred foreign income. A corresponding 
portion of the credit for foreign taxes is disallowed, thus 
limiting the credit to the taxable portion of the included 
income. The increased tax liability generally may be paid over 
an eight-year period.
Subpart F inclusion of deferred foreign income
      The mechanism for the mandatory inclusion of pre-
effective date foreign earnings is subpart F. The provision 
provides that the subpart F income of all specified foreign 
corporations is increased for the last taxable year\1492\ that 
begins before January 1, 2018, by its accumulated post-1986 
deferred foreign income. In contrast to the participation 
exemption deduction available only to domestic corporations 
that are U.S. shareholders under subpart F, the transition rule 
applies to all U.S. shareholders\1493\ of a specified foreign 
corporation. A specified foreign corporation means (1) a CFC or 
(2) any foreign corporation in which a domestic corporation is 
a U.S. shareholder (determined without regard to the special 
attribution rules of section 958(b)(4)), other than a PFIC that 
is not a CFC.\1494\ A specified foreign corporation that has 
deferred foreign income is a deferred foreign income 
corporation. Consistent with the general operation of subpart 
F, each U.S. shareholder of a specified foreign corporation 
must include in income its pro rata share of the foreign 
corporation's subpart F income attributable to its accumulated 
deferred foreign income.\1495\
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    \1492\Foreign corporations no longer in existence and for which 
there is no taxable year beginning or ending in 2017 are not within the 
scope of this provision.
    \1493\Sec. 951(b), which defines United States shareholder as any 
U.S. person that owns 10 percent or more of the voting classes of stock 
of a foreign corporation.
    \1494\Taxation of income earned by PFICs remains subject to the 
antideferral PFIC regime and are ineligible for the dividend received 
deduction under new section 245A.
    \1495\For purposes of taking into account its subpart F income 
under this rule, a noncontrolled 10/50 corporation is treated as a CFC.
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Accumulated post-1986 deferred foreign income
      Accumulated post-1986 deferred foreign income of a 
specified foreign corporation that is the subject of the 
mandatory inclusion under this provision is the greater of the 
accumulated post-1986 deferred foreign income determined as of 
November 2, 2017 (the date of introduction of the bill) or as 
of December 31, 2017. The includible portion of the accumulated 
post-1986 deferred foreign income is all post-1986 earnings and 
profits that are (1) not attributable to income that is 
effectively connected with the conduct of a trade or business 
in the United States and thus subject to current U.S. income 
tax, or (2) when distributed, not excludible from the gross 
income of a U.S. shareholder as previously taxed income under 
section 959.
      Post-1986 earnings and profits are those earnings that 
accumulated in taxable years beginning after 1986, computed in 
accordance with sections 964(a) and 986, even if arising from 
periods during which the U.S. shareholder did not own stock of 
the foreign corporation. Post-1986 earnings are not reduced by 
distributions during the taxable year to which section 965 
applies. Such earnings are increased by the amount of qualified 
deficits\1496\ that arose in a taxable year beginning before 
January 1, 2018, if such deficit is also treated as a qualified 
deficit for purposes of taxable years beginning after December 
31, 2017. Finally, the post-1986 earnings and profits are 
determined by reference to the foreign corporation's total 
earnings and profits, irrespective of the foreign tax credit 
separate category limitations.
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    \1496\Sec. 952(c)(1)(B)(ii).
---------------------------------------------------------------------------
      The Secretary may prescribe appropriate rules regarding 
the treatment of accumulated post-1986 foreign deferred income 
of specified foreign corporations that have shareholders who 
are not U.S. shareholders. Such rules may also include rules 
that are appropriate to implement the intent of the revised 
section 965 and the use of the date of introduction as one of 
the measurement dates in order to establish a floor for 
determining the post-1986 deferred foreign earnings and 
profits. For example, guidance may address the extent to which 
retroactive effective dates selected in entity classification 
elections filed after introduction of the bill will be 
permitted.\1497\
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    \1497\See Treas, Reg, 301.7701-3(c), under which an election may 
specify an effective date up to 75 days prior to the date on which the 
election is filed.
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Reductions of amounts included in income of U.S. shareholder of foreign 
        corporations with deficits in earnings and profits
      The income inclusion required of a U.S. shareholder under 
this transition rule is reduced by the portion of aggregate 
foreign earnings and profits deficit allocated to that person 
by reason of that person's interest in an ``E&P deficit foreign 
corporation.'' An E&P deficit foreign corporation is defined as 
any specified foreign corporation owned by the U.S. shareholder 
as of the date on which accumulated earnings and profits are 
measured for that corporation (November 2, 2017 or December 31, 
2017, as the case may be) and which also has a deficit in post-
1986 earnings and profits as of that date. Accordingly, the 
deficits of a foreign subsidiary that accumulated prior to its 
acquisition by the U.S. shareholder may be taken into account 
in determining the aggregate foreign earnings and profits 
deficit of a U.S. shareholder.\1498\
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    \1498\For example, assume that a foreign corporation organized 
after December 31, 1986 has $100 of accumulated earnings and profits as 
of November 1, 2017, and December 31, 2017 (determined without 
diminution by reason of dividends distributed during the taxable year 
and after any increase for qualified deficits), which consist of $120 
general limitation earnings and profits and a $20 passive limitation 
deficit, the foreign corporation's post-1986 earnings and profits would 
be $100, even if the $20 passive limitation deficit was a hovering 
deficit described in Treas. Reg. sec. 1.367(b)-17(d)(2). Foreign income 
taxes related to the hovering deficit, however, would not be deemed 
paid by the U.S. shareholder recognizing an incremental income 
inclusion.
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      The U.S. shareholder aggregates its pro rata share in the 
foreign E&P deficits of each such company and allocates such 
aggregate amount among the deferred foreign income corporations 
in which the shareholder is a U.S. shareholder. The aggregate 
foreign E&P deficit is allocable to a specified foreign 
corporation in the same ratio as the U.S. shareholder's pro 
rata share of post-1986 deferred income in that corporation 
bears to the U.S. shareholder's pro rata share of accumulated 
post-1986 deferred foreign income from all deferred income 
companies of such shareholder.
      To illustrate the ratio, assume that Z, a domestic 
corporation, is a U.S. shareholder with respect to each of four 
specified foreign corporations, two of which are E&P deficit 
foreign corporations. Assume further the foreign companies have 
the following accumulated post-1986 deferred foreign income or 
foreign earnings and profits deficits as of November 2, 2017, 
and December 31, 2017:
Example

------------------------------------------------------------------------
                                                 Post-1986
     Specified Foreign Corp.        Percentage    profit/      Pro Rata
                                      Owned     deficit USD     Share
------------------------------------------------------------------------
A................................          60%     ($1,000)       ($600)
B................................          10%       ($200)        ($20)
C................................          70%       $2,000       $1,400
D................................         100%       $1,000       $1,000
------------------------------------------------------------------------

      The aggregate foreign earnings and profits deficit of the 
U. S. shareholder is ($620), and the aggregate share of 
accumulated post-1986 deferred foreign income is $2,400. Thus, 
the portion of the aggregate foreign earnings and profits 
deficit allocable to Corporation C is ($362), that is, ($620) 
 1400/2400. The remainder of the aggregate foreign 
earnings and profits deficit is allocable to Corporation D. The 
U.S. shareholder has a net surplus of earnings and profits in 
the amount of $1,780.
      The provision also permits intragroup netting among U.S. 
shareholders in an affiliated group in which there is at least 
one U.S. shareholder with a net E&P surplus and another with a 
net E&P deficit. The net E&P surplus shareholder may reduce its 
net surplus by the shareholder's applicable share of aggregate 
unused E&P deficit, based on the group's ownership percentage 
of the members. For example, a U.S. corporation may have two 
domestic subsidiaries, X and Y, in which it owns 100 percent 
and 80 percent, respectively. If X has a $1,000 net E&P 
surplus, and Y has $1,000 net E&P deficit, X is an E&P net 
surplus shareholder, and Y is an E&P net deficit shareholder. 
The net E&P surplus of X may be reduced by the net E&P deficit 
of Y to the extent of the group's ownership percentage in Y, 
which is 80-percent. The remaining net E&P deficit of Y is 
unused. If the U.S. shareholder Z is also a wholly owned 
domestic subsidiary of the same U.S. parent as X and Y, the 
group ownership percentage of Y is unchanged, and the surpluses 
of X and Z are reduced ratably by 800 of the net E&P deficit of 
Y.
Participation exemption applied to accumulated post-1986 deferred 
        foreign income
      A U.S. shareholder of a specified foreign corporation is 
allowed a deduction of a portion of the increased subpart F 
income attributable to the inclusion of pre-effective date 
deferred foreign income. The amount of the deduction is the sum 
of the 14-percent rate equivalent percentage of the inclusion 
amount that is the shareholder's aggregate cash position and 
the 7-percent rate equivalent percentage of the portion of the 
inclusion that exceeds the aggregate cash position. By stating 
the permitted deduction in the form of a tax rate equivalent 
percentage, the provision ensures that all pre-effective date 
accumulated post-1986 deferred foreign income is subject to 
either a 7-percent or 14-percent rate of tax, depending on the 
underlying assets as of the measurement date, without regard to 
the corporate tax rate that may be in effect at the time of the 
inclusion. For example, corporate taxpayers that use a fiscal 
year as the taxable year may report the increased subpart F 
income in a taxable year for which a reduced corporate tax rate 
would otherwise apply (on a pro-rated basis under section 15), 
but the allowable deduction would be reduced such that the rate 
of U.S. tax on the income inclusion would be 7 or 14 percent.
            Aggregate cash position
      The aggregate cash position of a U.S. shareholder is the 
average of the sum of the shareholder's pro rata share of the 
cash position of each specified foreign corporation with 
respect to which that shareholder is a U.S. shareholder on each 
of three dates: Date of introduction (November 2, 2017) and the 
last day of the two most recent taxable years ending before the 
date of introduction. Appropriate adjustments are made if a 
specified foreign corporation is not in existence on one or 
more of those dates. By using a three-year average as the 
aggregate cash position for a U.S. shareholders, the effect of 
unusual or anomalous transactions is muted.
      For purposes of this computation, the cash position of 
certain non-corporate entities that would be treated as 
specified foreign corporations if they were foreign 
corporations is also included. The cash position of an entity 
consists of all cash, net accounts receivables, and the fair 
market value of similarly liquid assets, specifically including 
personal property that is actively traded on an established 
financial market, government securities, certificates of 
deposit, commercial paper, foreign currency, and short-term 
obligations. In addition, the Secretary may identify other 
assets that are economically equivalent to the enumerated 
assets that are included.
      Certain reductions from aggregate cash position are 
specified in the provision. First, rules are provided to avoid 
the double counting of cash position of specified foreign 
corporations in an affiliated group, while ensuring that all of 
the cash position is taken into account. Second, regardless of 
the form in which a specified foreign corporation holds 
earnings, to the extent that the earnings constitute blocked 
income that could not be distributed by the corporation due to 
local jurisdiction restrictions,\1499\ such earnings are not 
included in the cash position of that specified foreign 
corporation. The blocked income remains within the scope of the 
accumulated post-1986 deferred foreign income that is subject 
to inclusion under this provision.
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    \1499\Sec. 964(b) and regulations thereunder.
---------------------------------------------------------------------------
      In addition to the authority to identify other assets 
that are subject to the cash position determination by 
regulation, the provision also authorizes the Secretary to 
disregard transactions that he determines had the principal 
purpose of reducing the aggregate foreign cash position.
Foreign tax credits reduced
      A portion of foreign income taxes deemed paid or accrued 
with respect to the increased subpart F income attributable to 
the inclusion of pre-effective date deferred foreign income is 
not creditable against the Federal income tax attributable to 
the inclusion, nor is it deductible. The disallowed portion of 
foreign tax credits is 60-percent of foreign taxes paid 
attributable to the portion of the inclusion attributable to 
the aggregate cash position plus 80-percent of foreign taxes 
paid attributable to the remaining portion of the section 965 
inclusion.\1500\
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    \1500\Other foreign tax credits used by a taxpayer against tax 
liability resulting from the deemed inclusion apply in full.
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      The provision coordinates the disallowance of foreign tax 
credits described above with the requirement\1501\ that a 
domestic corporate shareholder is deemed to receive a dividend 
in an amount equal to foreign taxes it is deemed to have paid 
and for which it claimed a credit. Under the coordination rule, 
the foreign taxes treated as paid or accrued by a domestic 
corporation as a result of the inclusion are limited to those 
taxes in proportion to the taxable portion of the section 965 
inclusion. The gross-up amount equals the total foreign income 
taxes multiplied by the fraction, numerator of which is taxable 
portion of the increased subpart F income under this provision 
and the denominator of which is the total increase in subpart F 
income under this provision.
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    \1501\Sec. 78.
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      The amount of deferred foreign income required to be 
included in subpart F income under this provision is 
disregarded for purposes of determining the amount of income 
from foreign sources and the combined foreign oil and gas 
income that a U.S. shareholder has for purposes of the 
recapture rules applicable to overall foreign losses, separate 
limitation losses, and foreign oil and gas losses under 
sections 904(f)(1) and 907(c)(4).
      The foreign income taxes deemed paid with respect to the 
inclusion required by the provision and for which no credit is 
allowed in the year of inclusion by reason of section 904 
limitations (e.g., because part or all of the inclusion 
required by the provision is offset by a net operating loss 
deduction) are eligible for a special 20 year carry forward 
period, rather than the otherwise available 10 year period.
Installment payments
      A U.S. shareholder may elect to pay the net tax liability 
resulting from the mandatory inclusion of pre-effective-date 
undistributed CFC earnings in eight equal installments. The net 
tax liability that may be paid in installments is the excess of 
the U.S. shareholder's net income tax for the taxable year in 
which the pre-effective-date undistributed CFC earnings are 
included in income over the taxpayer's net income tax for that 
year determined without regard to the inclusion. Net income tax 
means net income tax as defined for purposes of the general 
business credit, but reduced by the amount of that credit.
      An election to pay tax in installments must be made by 
the due date for the tax return for the taxable year in which 
the pre-effective-date undistributed CFC earnings are included 
in income. The Treasury Secretary has authority to prescribe 
the manner of making the election. The first installment must 
be paid on the due date (determined without regard to 
extensions) for the tax return for the taxable year of the 
income inclusion. Succeeding installments must be paid annually 
no later than the due dates (without extensions) for the income 
tax return of each succeeding year. If a deficiency is later 
determined with respect to the net tax liability, the 
additional tax due may be prorated among all installment 
payments in most circumstances. The portions of the deficiency 
prorated to an installment that was due before the deficiency 
was assessed must be paid upon notice and demand. The portion 
prorated to any remaining installment is payable with the 
timely payment of that installment payment, unless the 
deficiency is attributable to negligence, intentional disregard 
of rules or regulations, or fraud with intent to evade tax, in 
which case the entire deficiency is payable upon notice and 
demand.
      The timely payment of an installment does not incur 
interest. If a deficiency is determined that is attributable to 
an understatement of the net tax liability due under this 
provision, the deficiency is payable with underpayment interest 
for the period beginning on the date on which the net tax 
liability would have been due, without regard to an election to 
pay in installments, and ending with the payment of the 
deficiency. Furthermore, any amount of deficiency prorated to a 
remaining installment also bears interest on the deficiency, 
but not on the original installment amount.
      The provision also includes an acceleration rule. If (1) 
there is a failure to pay timely any required installment, (2) 
there is a liquidation or sale of substantially all of the U.S. 
shareholder's assets (including in a bankruptcy case), (3) the 
U.S. shareholder ceases business, or (4) another similar 
circumstance arises, the unpaid portion of all remaining 
installments is due on the date of the event (or, in a title 11 
case or similar proceeding, the day before the petition is 
filed).
Special rule for S corporations
      A special rule permits deferral of the transition net tax 
liability for shareholders of a U.S. shareholder that is a 
flow-through entity known as an S corporation.\1502\ The S 
corporation is required to report on its income tax return the 
amount includible in gross income by reason of this provision, 
as well as the amount of deduction that would be allowable, and 
provide a copy of such information to its shareholders. Any 
shareholder of the S corporation may elect to defer his portion 
of the net tax liability at transition to the participation 
exemption system until the shareholder's taxable year in which 
a triggering event occurs. The election to defer the tax is due 
not later than the due date for the return of the S corporation 
for its last taxable year that begins before January 1, 2018.
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    \1502\Section 1361 defines an S corporation as a domestic small 
business corporation that has an election in effect for status as an S 
corporation, with fewer than 100 shareholders, none of whom are 
nonresident aliens, and all of whom are individuals, estates, trusts or 
certain exempt organizations.
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      Three types of events may trigger an end to deferral of 
the net tax liability. The first type of triggering event is a 
change in the status of the corporation as an S corporation. 
The second category includes liquidation, sale of substantially 
all corporate assets, termination of the company or end of 
business, or similar event, including reorganization in 
bankruptcy. The third type of triggering event is a transfer of 
shares of stock in the S corporation by the electing taxpayer, 
whether by sale, death or otherwise, unless the transferee of 
the stock agrees with the Secretary to be liable for net tax 
liability in the same manner as the transferor. Partial 
transfers trigger the end of deferral only with respect to the 
portion of tax properly allocable to the portion of stock sold.
      If a shareholder of an S corporation has elected deferral 
under the special rule for S corporation shareholders and a 
triggering event occurs, the S corporation and the electing 
shareholder are jointly and severally liable for any net tax 
liability and related interest or penalties. The period within 
which the IRS may collect such liability does not begin before 
the date of an event that triggers the end of the deferral. If 
an election to defer payment of the net tax liability is in 
effect for a shareholder, that shareholder must report the 
amount of the deferred net tax liability on each income tax 
return due during the period that the election is in effect. 
Failure to include that information with each income tax return 
will result in a penalty equal to five-percent of the amount 
that should have been reported.
      After a triggering event occurs, a shareholder of the S 
corporation may elect to pay the net tax liability in eight 
equal installments, subject to rules similar to those generally 
applicable absent deferral. Whether a shareholder may elect to 
pay in installments depends upon the type of event that 
triggered the end of deferral. If the triggering event is a 
liquidation, sale of substantially all corporate assets, 
termination of the company or end of business, or similar 
event, the installment payment election is not available. 
Instead, the entire net tax liability is due upon notice and 
demand. The installment election is due with the timely return 
for the year in which the triggering event occurs. The first 
installment payment is required by the due date of the same 
return, determined without regard to extensions of time to 
file.
      Effective date.--The provision is effective for the last 
taxable year of a foreign corporation that begins before 
January 1, 2018, and with respect to U.S. shareholders, for the 
taxable years in which or with which such taxable years of the 
foreign corporations end.

                            SENATE AMENDMENT

In general
      The provision generally requires that, for the last 
taxable year beginning before January 1, 2018, any U.S. 
shareholder of a specified foreign corporation must include in 
income its pro rata share of the accumulated post-1986 deferred 
foreign income of the corporation. For purposes of this 
provision, a specified foreign corporation is any foreign 
corporation that has at least one U.S. shareholder. It excludes 
PFICs that are not also CFCs. A portion of that pro rata share 
of foreign earnings is deductible; the amount of the deductible 
portion depends upon whether the deferred earnings are held in 
cash or other assets. The deduction results in a reduced rate 
of tax with respect to income from the required inclusion of 
pre-effective date earnings. A corresponding portion of the 
credit for foreign taxes is disallowed, thus limiting the 
credit to the taxable portion of the included income. The 
separate foreign tax credit limitation rules of present law 
section 904 apply, with coordinating rules. The increased tax 
liability generally may be paid over an eight-year period. 
Special rules are provided for S corporations and real estate 
investment trusts (``REITs'').
Subpart F
      The mechanism for requiring an inclusion of pre-
effective-date foreign earnings is subpart F. The provision 
provides that in the last taxable year of a deferred foreign 
income corporation that begins before January 1, 2018, which is 
that foreign corporation's last taxable year before the 
transition to the new corporate tax regime elsewhere in the 
bill goes into effect, the subpart F income of the foreign 
corporation is increased by the greater of the accumulated 
post-1986 deferred foreign income of the corporation, 
determined as of November 9, 2017, or as of December 31, 2017 
(``measurement date''). The amount so determined is includible 
in gross income under section 951 (hereinafter, ``the section 
951 inclusion'').
      The transition rule applies to all U.S. 
shareholders\1503\ of a deferred foreign income corporation. 
``Deferred foreign income corporation'' is any specified 
foreign corporation with accumulated post-1986 deferred income 
that is greater than zero. A specified foreign corporation is 
defined as any CFC as well as any section 902 corporation, as 
defined in section 909(d)(5) prior to date of enactment of this 
bill, i.e., any foreign corporation in which a U.S. person owns 
10 percent of the voting stock. Consistent with the general 
operation of subpart F, each U.S. shareholder of a deferred 
foreign income corporation must include in income the 
shareholder's pro rata share of the foreign corporation's 
subpart F income attributable to its section 951 
inclusion.\1504\
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    \1503\Sec. 951(b) defines United States shareholder as any U.S. 
person that owns 10 percent or more of combined voting classes of stock 
of a foreign corporation.
    \1504\For purposes of taking into account its subpart F income 
under this rule, a noncontrolled section 902 corporation is treated as 
a CFC.
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Accumulated post-1986 deferred foreign income
      A specified foreign corporation's accumulated post-1986 
deferred foreign income on the measurement date is based on all 
post-1986 foreign earnings and profits (``E&P'') that are not 
previously taxed and are neither (1) attributable to income 
that is effectively connected with the conduct of a trade or 
business in the United States and subject to U.S. income tax 
nor (2) subpart F income (determined without regard to the 
section 951 inclusion) included in the gross income of a U.S. 
shareholder. The potential pool of includible earnings includes 
all undistributed foreign earnings accumulated in taxable years 
beginning after 1986, computed in accordance with sections 
964(a) and 986, taking into account only periods when the 
foreign corporation was a specified corporation. The pool of 
post-1986 foreign earnings and profits is not reduced by 
distributions during the taxable year to which section 965 
applies.
Reductions of amounts included in income of U.S. shareholder of foreign 
        corporations with deficits in E&P
      The pool of post-1986 earnings and profits taken into 
consideration in computing the section 951 inclusion required 
of a U.S. shareholder under this transition rule generally is 
reduced by foreign earnings and profits deficits that are 
properly allocated to that person. The U.S. shareholder must 
determine its aggregate E&P deficit based on its interest in 
each specified foreign corporation with a deficit in post-1986 
foreign earnings and profits as of the measurement date (``E&P 
deficit foreign corporation'').
      The U.S. shareholder's aggregate E&P deficit is then 
allocated among the deferred foreign income corporations in the 
same ratio as the U.S. shareholder's pro rata share of post-
1986 deferred income in that corporation bears to the U.S. 
shareholder's pro rata share of accumulated post-1986 deferred 
foreign income from all deferred foreign income corporations 
with respect to which the shareholder is a U.S. shareholder. 
For the portion of aggregate E&P deficits that include 
qualified deficits, the portion of the deficit that is 
attributable to a qualified deficit, and the qualified 
activity, must be identified. The provision does not permit 
intragroup netting among U.S. shareholders within an affiliated 
group.
      In taxable years beginning after 2017, amounts by which 
the section 951 inclusion was reduced by aggregate E&P deficits 
are considered as amounts included in the gross income of the 
U.S. shareholder. The shareholder's pro rata share of the E&P 
of an E&P deficit foreign corporation that used qualified 
deficits to reduce its section 951 inclusion is increased by 
the amount of such deficit and attributed to the same activity 
to which the income was attributed.
Deductions from section 951 inclusion
      To determine the taxable portion of the section 951 
inclusion, the U.S. shareholders with accumulated deferred 
foreign income may deduct a portion of the section 951 
inclusion in an amount that depends upon the proportion of 
aggregate earnings and profits attributable to cash assets 
rather than noncash assets, in the nature of a partial 
dividends-received deduction. A U.S. shareholder may deduct 
71.4 percent of the aggregate earnings and profits attributable 
to cash assets, and 85.7 percent of the remainder of the 
aggregate earnings and profits in the section 951 
inclusion.\1505\
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    \1505\Committee Print, Reconciliation Recommendations Pursuant to 
H. Con. Res. 71, S. Prt. 115-20, (December 2017), as reprinted on the 
website of the Senate Budget Committee, available at https://
www.budget.senate.gov/taxreform., at footnote 1198, indicated that the 
income deducted was to be treated as exempt from tax, with the result 
that the deducted income, if earned by a partnership, could give rise 
to an increase in a partner's basis under section 705(a)(1)(B).
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      A U.S. shareholder may elect, no later than with a timely 
filed return for the taxable year, not to apply its net 
operating loss deduction to the deemed repatriation. If so, 
neither the section 951 inclusion nor any related deemed paid 
foreign tax credits may be taken into account in computing the 
net operating loss deduction for that year.
Cash position
      The aggregate earnings and profits attributable to cash 
assets for a U.S. shareholder is the greater of the pro rata 
share of the cash position of all specified foreign 
corporations as of the last day of the last taxable year 
beginning before January 1, 2018, or the average of the cash 
position determined on the last day of each of the two taxable 
years ending immediately before November 9, 2017. For purposes 
of this computation, the cash position of certain non-corporate 
entities that would be treated as specified foreign 
corporations if they were foreign corporations is also 
included. The cash position of an entity consists of all cash, 
net accounts receivables, and the fair market value of 
similarly liquid assets, specifically including personal 
property that is actively traded on an established financial 
market (other than stock in the specified foreign corporation) 
government securities, certificates of deposit, commercial 
paper, and short-term obligations.
      To avoid double counting of cash assets, a U.S. 
shareholder may disregard accounts receivable and short-term 
obligations of a specified foreign corporation if that 
shareholder can establish that the amounts were already taken 
into account by that shareholder with respect to another 
specified foreign corporation.
      The Secretary may identify other assets that are 
economically equivalent to the enumerated assets that are 
treated as cash. The provision also authorizes the Secretary to 
disregard transactions that are determined to have the 
principal purpose of reducing the aggregate foreign cash 
position.
Foreign tax credit
      A portion of foreign income tax that is deemed paid or 
accrued with respect to the section 951 inclusion is not 
creditable or deductible against the Federal income tax 
attributable to the inclusion. The disallowed portion of 
foreign tax credits is 71.4 percent of foreign taxes paid 
attributable to the portion of the section 965 inclusion 
attributable to the aggregate cash position, plus 85.7 percent 
of foreign taxes paid attributable to the remaining portion of 
the section 965 inclusion.\1506\ The provision coordinates the 
disallowance of foreign tax credits with the requirement\1507\ 
that a domestic corporate shareholder is deemed to receive a 
dividend in an amount equal to foreign taxes it is deemed to 
have paid and for which it claimed a credit.
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    \1506\Other foreign tax credits used by a taxpayer against tax 
liability resulting from the deemed inclusion apply in full.
    \1507\Sec. 78.
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Limitations on assessment extended
      The provision also allows an exception to the otherwise 
applicable limitations period for assessment of tax to ensure 
that the period for assessment of underpayments in tax related 
to the treatment of the pre-effective date foreign earnings 
does not expire prior to six years from the date on which the 
return initially reflecting the section 951 inclusion was 
filed.
Installment payments
      The Senate amendment follows the House provision in 
allowing a U.S. shareholder to elect to pay the net tax 
liability resulting from the section 951 inclusion in eight 
installments. However, if installment payment is elected, 
rather than requiring eight equal installments, the Senate 
amendment requires that the payments for each of the first five 
years equal 8 percent of the net tax liability, the sixth 
installment equals 15 percent of the net tax liability, 
increasing to 20 percent for the seventh installment and the 
remaining balance of 25 percent in the eighth year.
Special rule for S corporations
      The Senate amendment also includes the special rule of 
the House provision that permits deferral of the transition net 
tax liability for shareholders of a U.S. shareholder that is a 
flow-through entity known as an S corporation.\1508\ After a 
triggering event occurs, a shareholder in the S corporation may 
elect to pay the net tax liability in eight installments, 
subject to rules similar to those generally applicable absent 
deferral.
---------------------------------------------------------------------------
    \1508\Section 1361 defines an S corporation as a domestic small 
business corporation that has an election in effect for status as an S 
corporation, with no more than 100 shareholders, none of whom are 
nonresident aliens, and all of whom are individuals, estates, trusts or 
certain exempt organizations.
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Special rules for REITs
      To alleviate burden of compliance with this section by 
REITs, special rules are provided if a U.S. shareholder is a 
REIT. First, although it must determine its pro rata share of 
the increase in subpart F income in accordance with the rules 
described above, the REIT is not required to take into account 
the section 951 inclusion for purposes of determining the 
REIT's amount of qualified REIT gross income.\1509\ The section 
951 inclusion is, however, taken into account for purposes of 
determining the income potentially required to be included in 
taxable income under section 857(b). Unlike a regular 
subchapter C corporation, a REIT is able to deduct the portion 
of its income that is distributed to its shareholders as a 
dividend or qualifying liquidating distribution each 
year.\1510\ The distributed income of the REIT is not taxed at 
the entity level; instead, it is taxed once, at the investor 
level. As a result, a required inclusion under this section may 
trigger a requirement that the REIT distribute an amount equal 
to 90 percent of that inclusion despite the fact that it 
received no distribution from the deferred foreign income 
corporation.
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    \1509\To qualify as a REIT, an entity must meet certain income 
requirements. A REIT is restricted to earning certain types of 
generally passive income. Among other requirements, at least 75 percent 
of the gross income of a REIT in each taxable year must consist of real 
estate-related income. Sec. 856. In addition, a REIT is required to 
distribute at least 90 percent of REIT income (other than net capital 
gain) annually. Sec. 857. Even if a REIT meets the 90-percent income 
distribution requirement for REIT qualification, more stringent 
distribution requirements must be met in order to avoid an excise tax 
under section 4981.
    \1510\Liquidating distributions are covered to the extent of 
earnings and profits, and are defined to include redemptions of stock 
that are treated by shareholders as a sale of stock under section 302. 
Secs. 857(b)(2)(B), 561, and 562(b).
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      To avoid requiring that any distribution requirement be 
satisfied in one year, an election to defer the section 951 
inclusion is permitted. Under a timely election, a REIT may 
instead take the amounts into income over a period of eight 
years. It must include 8 percent in each of the five years 
beginning with the initial year in which the section 951 
inclusion is determined, 15 percent in the sixth year, 20 
percent in the seventh year and 25 percent in the eighth year. 
In each of those years, it may claim a partial dividends-
received deduction in the applicable percentages in proportion 
to the amount included in each of the eight years. Neither the 
REIT nor the recipient of the distribution may elect to use the 
installment payment.
      In the event that a REIT liquidates, ceases to operate 
its business, or distributes substantially all its assets (or 
any other similar event occurs), any portion of the required 
inclusion not yet taken into income is accelerated and required 
to be included as gross income as of the day before the event.
Recapture from expatriated entities
      The provision denies any deduction claimed with respect 
to the mandatory subpart F inclusion and imposes a 35-percent 
tax on the entire inclusion if a U.S. shareholder becomes an 
expatriated entity within the meaning of section 7874(a)(2) at 
any point within the ten-year period following enactment of the 
Tax Cuts and Jobs Act. An entity that becomes a surrogate 
foreign corporation that is treated as a domestic corporation 
under section 7874(b) is not within the scope of this recapture 
provision. Although the amount due is computed by reference to 
the year in which the deemed subpart F income was originally 
reported, the additional tax arises and is assessed for the 
taxable year in which the U.S. shareholder becomes an 
expatriated entity. No foreign tax credits are permitted with 
respect to the additional tax due as a result of the recapture 
rule.
Regulatory authority
      A specific grant of regulatory authority to carry out the 
intent of this provision is included. For example, the 
Secretary may identify instances in which it is appropriate to 
grant relief from potential double-counting of earnings and 
profits, which may occur due to different measurement dates 
applicable to specified foreign corporations within an 
affiliated group, or the timing of intragroup distributions. It 
also specifies that the Secretary shall prescribe rules or 
guidance in order to deter tax avoidance through use of entity 
classification elections and accounting method changes, among 
other possible strategies.
      Effective date.--The provision is effective for the last 
taxable year of a foreign corporation that begins before 
January 1, 2018, and with respect to U.S. shareholders, for the 
taxable years in which or with which such taxable years of the 
foreign corporations end.

                          CONFERENCE AGREEMENT

      The conference agreement generally follows the Senate 
amendment, with several modifications, including those 
described below.
Scope of earnings and profits subject to the transition tax
      The provision applies to all CFCs. It also applies to all 
foreign corporations (other than PFICs), in which a U.S. person 
owns a 10-percent voting interest, rather than only CFCs and 
those corporations within the definition of section 902 
corporation. However, in the case of a foreign corporation that 
is not a CFC, there must be at least one U.S. shareholder that 
is a domestic corporation in order for the foreign corporation 
to be a specified foreign corporation. Such entities must 
determine their deferred foreign income based on the greater of 
the aggregate post-1986 accumulated foreign earnings and 
profits as of November 2, 2017 or December 31, 2017, not 
reduced by distributions during the taxable year ending with or 
including the measurement date, unless such distributions were 
made to another specified foreign corporation. The portion of 
post-1986 earnings and profits subject to the transition tax 
does not include earnings and profits that were accumulated by 
a foreign company prior to attaining its status as a specified 
foreign corporation.
      Deferred earnings of a U.S. shareholder are reduced (but 
not below zero) by the shareholder's share of deficits as of 
November 2, 2017, from a specified foreign corporation that is 
not a deferred foreign income corporations, including the pro 
rata share of deficits of another U.S. shareholder in a 
different U.S. ownership chain within the same U.S. affiliated 
group. The deficits (including hovering deficits\1511\) of a 
foreign subsidiary that accumulated while it was a specified 
foreign corporation may be taken into account in determining 
the aggregate foreign earnings and profits deficit of a U.S. 
shareholder. Therefore, the amount of post-1986 earnings and 
profits of a specified foreign corporation is the amount of 
positive earnings and profits accumulated as of the measurement 
date reduced by any deficit in earnings and profits of the 
specified foreign corporation as of the measurement date, 
without regard to the limitation category of the earnings or 
deficit. In taxable years beginning with the year of the 
section 951 inclusion, amounts by which the section 951 
inclusion was reduced by aggregate E&P deficits are considered 
as amounts included in the gross income of the U.S. shareholder 
for purposes of applying section 959.
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    \1511\See, Treas. Reg. sec. 1.367(b)-7(d)(2) (definition of 
hovering deficit).
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      For example, assume that a foreign corporation organized 
after December 31, 1986 has $100 of accumulated earnings and 
profits as of November 2, 2017, and December 31, 2017 
(determined without diminution by reason of dividends 
distributed during the taxable year and after any increase for 
qualified deficits), which consist of $120 general limitation 
earnings and profits and a $20 passive limitation deficit, the 
foreign corporation's post-1986 earnings and profits would be 
$100, even if the $20 passive limitation deficit was a hovering 
deficit. Foreign income taxes related to the hovering deficit, 
however, would not generally be deemed paid by the U.S. 
shareholder recognizing an incremental income inclusion. 
However, the conferees expect the Secretary may issue guidance 
to provide that, solely for purposes of calculating the amount 
of foreign income taxes deemed paid by the U.S. shareholder 
with respect to an inclusion under section 965, a hovering 
deficit may be absorbed by current year earnings and profits 
and the foreign income taxes related to the hovering deficit 
may be added to the specified foreign corporation's post-1986 
foreign income taxes in that separate category on a pro rata 
basis in the year of inclusion.\1512\
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    \1512\Cf. Treas. Reg. sec. 1.367(b)-7(d)(2)(ii) and (iii).
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      In order to avoid double-counting and double non-counting 
of earnings, the Secretary may provide guidance to adjust the 
amount of post-1986 earnings and profits of a specified foreign 
corporation to ensure that a single item of a specified foreign 
corporation is taken into account only once in determining the 
income of a United States shareholder subject to this 
provision. Such an adjustment may be necessary, for example, 
when there is a deductible payment (e.g., interest or 
royalties) from one specified foreign corporation to another 
specified foreign corporation between measurement dates.
      The conferees are also aware that certain taxpayers may 
have engaged in tax strategies designed to reduce the amount of 
post-1986 earnings and profits in order to decrease the amount 
of the inclusion required under this provision. Such tax 
strategies may include a change in entity classification, 
accounting method, and taxable year, or intragroup transactions 
such as distributions or liquidations. The conferees expect the 
Secretary to prescribe rules to adjust the amount of post-1986 
earnings and profits in such cases in order to prevent the 
avoidance of the purposes of this section.
      Furthermore, the conferees expect that the Secretary will 
exercise his authority under the consolidated return provisions 
to appropriately limit the netting across chains of ownership 
within a group of related parties in the application of this 
provision. However, nothing in this provision is intended to be 
interpreted as limiting the Secretary's authority to use such 
regulatory authority to prescribe regulations on proper 
application of this section on a consolidated basis for 
affiliated groups filing a consolidated return.
Application of participation exemption deduction and related foreign 
        tax credits
      Instead of prescribing a fixed percentage of the section 
951 inclusion resulting from section 965 for which a partial 
dividends-received deduction is permitted, the conference 
agreement adopts the rate equivalent percentage method used in 
the House bill. As a result, the total deduction from the 
amount of the section 951 inclusion is the amount necessary to 
result in a 15.5-percent rate of tax on accumulated post-1986 
foreign earnings held in the form of cash or cash equivalents, 
and 8-percent rate of tax on all other earnings. The 
calculation is based on the highest rate of tax applicable to 
corporations in the taxable year of inclusion, even if the U.S. 
shareholder is an individual.
      The use of rate equivalent percentages is intended to 
ensure that the rates of tax imposed on the deferred foreign 
income is similar for all U.S. shareholders, regardless of the 
year in which section 965 gives rise to an income inclusion. 
Individual U.S. shareholders, and the investors in U.S. 
shareholders that are pass-through entities generally can elect 
application of corporate rates for the year of inclusion.\1513\ 
In addition, the increase in income that is not taxed by reason 
of the partial dividends-received deduction allowed under this 
provision is treated as income exempt from tax for purposes of 
determining the basis in an interest in a partnership or 
subchapter S corporation, but not as income exempt from tax for 
purposes of determining the accumulated adjustments account of 
a subchapter S corporation.\1514\ Similarly, the conferees 
expect the Secretary to provide regulations or other guidance 
that provide for similar treatment under section 986(c), such 
that any gain or loss recognized thereunder with respect to 
distributions of earnings previously taxed (or treated as 
previously taxed) by reason of section 965(a) will be 
diminished proportionately to the diminution of the net taxable 
income resulting from section 965(a) by reason of the deduction 
allowed under section 965(c).
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    \1513\Sec. 962 allows individuals to make the election for a 
specific taxable year, subject to regulations provided by the 
Secretary.
    \1514\Secs. 705(a)(1)(B), 1367(a)(1)(A) and 1368(e)(1)(A).
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      To reflect the change in the applicable rates of 
deduction, the amounts by which foreign tax credits are reduced 
are also changed. In addition, the rules for coordination of 
this provision with the limitations on foreign tax credits 
follows the House provision. Under the coordination rule, the 
foreign taxes treated as paid or accrued by a domestic 
corporation as a result of the inclusion are limited to the 
those taxes in proportion to the taxable portion of the section 
965 inclusion. The gross-up amount equals the total foreign 
income taxes multiplied by the fraction, numerator of which is 
taxable portion of the increased subpart F income under this 
provision and the denominator of which is the total increase in 
subpart F income under this provision.
      The conferees recognize that basis adjustments (increases 
or decreases) may be necessary with respect to both the stock 
of the deferred foreign income corporation and the E&P deficit 
foreign corporation and authorizes the Secretary to provide for 
such basis adjustments or other adjustments, as may be 
appropriate. For example, with respect to the stock of the 
deferred foreign income corporation, the Secretary may 
determine that a basis increase is appropriate in the taxable 
year of the section 951A inclusion or, alternatively, the 
Secretary may modify the application of section 961(b)(1) with 
respect to such stock. Moreover, with respect to the stock of 
the E&P deficit corporation, the Secretary may require a 
reduction in basis for the taxable year in which the U.S. 
shareholder's pro rata share of the earnings of the E&P deficit 
corporation are increased.
      With respect to the denial of the partial dividend to any 
U.S. shareholder that becomes an expatriated entity within the 
meaning of section 7874(a)(2) at any point within the ten-year 
period following enactment of the Tax Cuts and Jobs Act, the 
conference agreement clarifies that U.S. shareholders acquired 
by a surrogate corporation are within the scope of the 
provision only if the surrogate corporation inverted post-
enactment.
Determination of cash position
      The determination of assets to be considered in measuring 
the cash position of an entity is modified in several ways. 
First, cash holdings of a specified foreign corporation in the 
form of publicly traded stock may be excluded to the extent 
that a U.S. shareholder can demonstrate that the value of such 
stock was taken into account as cash or cash equivalent by 
another specified foreign corporation with respect to which 
such shareholder is a U.S. shareholder.
      The conference agreement also provides that the cash 
position of a U.S. shareholder does not generally include the 
cash attributable to a direct ownership interest in a 
partnership, but preserves the rule that cash positions of 
certain noncorporate foreign entities owned by a specified 
foreign corporation are taken into account if such entities 
would be specified foreign corporations with respect to the 
U.S. shareholder if the entity were a foreign corporation. For 
example, if a U.S. shareholder owns a five-percent interest in 
a partnership, the balance of which is held by a specified 
foreign corporation with respect to which such shareholder is a 
U.S. shareholder, the partnership is treated as a specified 
foreign corporation with respect to the U.S. shareholder, and 
the cash or cash equivalents held by the partnership are 
includible in the aggregate cash position of the U.S. 
shareholder on a look-through basis. The conferees anticipate 
that the Secretary will provide guidance for taking into 
account only the specified foreign corporation's share of the 
partnership's cash position, and not the five-percent interest 
directly owned by the U.S. shareholder.
      Effective date.--The provision is effective for the last 
taxable year of a foreign corporation that begins before 
January 1, 2018, and with respect to U.S. shareholders, for the 
taxable years in which or with which such taxable years of the 
foreign corporations end.
5. Election to increase percentage of domestic taxable income offset by 
        overall domestic loss treated as foreign source (sec. 14305 of 
        the Senate amendment and sec. 904(g) of the Code)

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision modifies section 904(g) by providing an 
election to increase the percentage (but not greater than 100 
percent) of domestic taxable income offset by any pre-2018 
unused overall domestic loss and recharacterized as foreign 
source. The term ``pre-2018 unused overall domestic loss'' 
means any overall domestic loss which: (1) arises in a 
qualified taxable year beginning before January 1, 2018, and 
(2) has not been used under the general rule set forth in 
section 904(g)(1). The term ``qualified taxable year'' means 
any taxable year of the taxpayer beginning after December 31, 
2017, and before January 1, 2028.
      Effective date.--The provision shall apply to taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.

             B. Rules Related to Passive and Mobile Income

1. Deduction for foreign-derived intangible income and global 
        intangible low-taxed income (sec. 14202 of the Senate amendment 
        and new sec. 250 of the Code)

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      The provision provides domestic corporations with reduced 
rates of U.S. tax on their foreign-derived intangible income 
(``FDII'') and global intangible low-taxed income 
(``GILTI'').\1515\ GILTI is defined in section 14201 of the 
Senate amendment and new section 951A, while a domestic 
corporation's FDII is the portion of its intangible income, 
determined on a formulaic basis, that is derived from serving 
foreign markets. For taxable years beginning after December 31, 
2017, and before January 1, 2019, the effective tax rate on 
FDII is 21.875 percent and the effective U.S. tax rate on GILTI 
is 17.5 percent under the Senate amendment.\1516\ For taxable 
years beginning after December 31, 2018, and before January 1, 
2026, the effective tax rate on FDII is 12.5 percent and the 
effective U.S. tax rate on GILTI is 10 percent. For taxable 
years beginning after December 31, 2025, the effective tax rate 
on FDII is 15.625 percent and the effective U.S. tax rate on 
GILTI is 12.5 percent.
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    \1515\The deduction for FDII and GILTI is only available to 
domestic corporations. U.S. shareholders that are not domestic 
corporations are subject to full U.S. tax on their GILTI.
    \1516\Under sec. 13001 of the Senate amendment, the corporate tax 
rate is reduced to 20 percent for taxable years beginning after 
December 31, 2018.
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Deduction for FDII and GILTI
Deduction for FDII and GILTI and taxable income limitation
      In the case of domestic corporations for taxable years 
beginning after December 31, 2017, and before January 1, 2026, 
the provision generally allows as a deduction an amount equal 
to the sum of 37.5 percent of its FDII plus 50 percent of its 
GILTI (if any). For taxable years beginning after December 31, 
2025, the deduction for FDII is reduced to 21.875 percent and 
the deduction for GILTI is lowered to 37.5 percent.\1517\
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    \1517\The Committee intends that the deduction allowed by new Code 
section 250 be treated as exempting the deducted income from tax. Thus, 
for example, the deduction for global intangible low-taxed income could 
give rise to an increase in a domestic corporate partner's basis in a 
domestic partnership under section 705(a)(1)(B).
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      If the sum of a domestic corporation's FDII and GILTI 
amounts exceeds its taxable income determined without regard to 
this provision, then the amount of FDII and GILTI for which a 
deduction is allowed is reduced by an amount determined by such 
excess. The reduction in FDII for which a deduction is allowed 
equals such excess multiplied by a percentage equal to the 
corporation's FDII divided by the sum of its FDII and GILTI. 
The reduction in GILTI for which a deduction is allowed equals 
the remainder of such excess.\1518\
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    \1518\For example, consider a domestic corporation with $1,250 of 
FDII, $750 of GILTI, and taxable income (determined without regard to 
this provision) of $1,500. The sum of the corporation's FDII and GILTI 
amounts is $2,000, which exceeds $1,500 by $500. For purposes of this 
provision, the amount of FDII for which a deduction is allowed is 
reduced by $500 multiplied by $1,250/$2,000, or $312.50. The amount of 
GILTI for which a deduction is allowed is reduced by the remainder of 
the excess, or $187.50 (= $500  $750/$2,000).
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FDII
      The FDII of any domestic corporation is the amount which 
bears the same ratio to the corporation's deemed intangible 
income as its foreign-derived deduction eligible income bears 
to its deduction eligible income. In other words, a domestic 
corporation's FDII is its deemed intangible income multiplied 
by the percentage of its deduction eligible income that is 
foreign-derived. The calculation can also be expressed as the 
following:


      The Secretary is authorized to prescribe regulations or 
other guidance as may be necessary or appropriate to carry out 
this provision.
Deduction eligible income
      Deduction eligible income means, with respect to any 
domestic corporation, the excess (if any) of the gross income 
of the corporation--determined without regard to certain 
exceptions to deduction eligible income--over deductions 
(including taxes) properly allocable to such gross income 
(referred to in this document as ``deduction eligible gross 
income''). The exceptions to deduction eligible income are: (1) 
the subpart F income of the corporation determined under 
section 951; (2) the GILTI of the corporation; (3) any 
financial services income (as defined in section 904(d)(2)(D)) 
of the corporation; (4) any dividend received from a CFC with 
respect to which the corporation is a U.S. shareholder; and (5) 
any domestic oil and gas extraction income of the corporation; 
and (6) any foreign branch income (as defined in section 
904(d)(2)(J)) of the corporation.
      The formula for deduction eligible income can generally 
be written as follows:\1519\
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    \1519\This formula assumes that the excess described in the 
preceding paragraph is positive. Otherwise there is no deduction 
eligible income.
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Deduction Eligible Income = Gross Income-Exceptions-Allocable 
Deductions
where Exceptions refers to the exceptions to deduction eligible 
income and Allocable Deductions encompass all deductions 
(including taxes) property allocable to deduction eligible 
gross income.
Deemed intangible income
      The domestic corporation's deemed intangible income means 
the excess (if any) of its deduction eligible income over its 
deemed tangible income return. The deemed tangible income 
return means, with respect to any corporation, an amount equal 
to 10 percent of the corporation's qualified business asset 
investment (``QBAI''). Deemed intangible income can be 
calculated as follows:\1520\
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    \1520\If the quantity in this formula is negative, deemed 
intangible income is zero.
---------------------------------------------------------------------------
Deemed Intangible Income = Deduction Eligible Income-(10% 
 QBAI)

      For purposes of computing its FDII, a domestic 
corporation's QBAI is the average of the aggregate of its 
adjusted bases, determined as of the close of each quarter of 
the taxable year, in specified tangible property used in its 
trade or business and of a type with respect to which a 
deduction is allowable under section 167. The adjusted basis in 
any property must be determined using the alternative 
depreciation system under section 168(g), notwithstanding any 
provision of law (or any other section of the Senate amendment) 
which is enacted after the date of enactment of this provision 
(unless such later enacted law specifically and directly amends 
this provision's definition).
      Specified tangible property means any tangible property 
used in the production of deduction eligible income. If such 
property was used in the production of deduction eligible 
income and income that is not deduction eligible income (i.e., 
dual-use property), the property is treated as specified 
tangible property in the same proportion that the amount of 
deduction eligible gross income produced with respect to the 
property bears to the total amount of gross income produced 
with respect to the property.\1521\ In other words, the 
percentage of a domestic corporation's adjusted basis in dual-
use property that is included in QBAI equals the deduction 
eligible gross income produced with respect to the property 
divided by the total gross income produced with respect to the 
property.
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    \1521\For example, if a building is used in the production of 
$1,000 of total gross income for a taxable year, $250 of which was 
domestic oil and gas extraction income and the remaining $750 of which 
was deduction eligible gross income, then 75 percent of a domestic 
corporation's average adjusted basis in the building is included in 
QBAI for that taxable year.
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Foreign-derived deduction eligible income
      Foreign-derived deduction eligible income means, with 
respect to a taxpayer for its taxable year, any deduction 
eligible income of the taxpayer that is derived in connection 
with (1) property that is sold by the taxpayer to any person 
who is not a United States person and that the taxpayer 
establishes to the satisfaction of the Secretary is for a 
foreign use\1522\ or (2) services provided by the taxpayer that 
the taxpayer establishes to the satisfaction of the Secretary 
are provided to any person, or with respect to property, not 
located within the United States. Foreign use means any use, 
consumption, or disposition that is not within the United 
States. Special rules for determining foreign use apply to 
transactions that involve property or services provided to 
domestic intermediaries or related parties.
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    \1522\If property is sold by a taxpayer to a person who is not a 
U.S. person, and after such sale the property is subject to 
manufacture, assembly, or other processing (including the incorporation 
of such property, as a component, into a second product by means of 
production, manufacture, or assembly) outside the United States by such 
person, then the property is for a foreign use.
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      For purposes of the provision, the terms ``sold,'' 
``sells'', and ``sale'' include any lease, license, exchange, 
or other disposition.
Property or services provided to domestic intermediaries
      If a taxpayer sells property to another person (other 
than a related party) for further manufacture or modification 
within the United States, the property is generally not treated 
as sold for a foreign use even if such other person 
subsequently uses such property for foreign use. However, there 
is an exception to this general rule for property (1) that is 
ultimately sold by a related party, or used by a related party 
in connection with property that is sold or the provision of 
services, to another person who is an unrelated party who is 
not a U.S. person and (2) that the taxpayer establishes to the 
satisfaction of the Secretary is for a foreign use.\1523\ 
Deduction eligible income derived in connection with services 
provided to another person (other than a related party) located 
within the United States is not treated as foreign-derived 
deduction eligible income, even if the other person uses the 
services in providing services the income from which is 
considered foreign-derived deduction eligible income.
---------------------------------------------------------------------------
    \1523\In other words, the fact that a component is included in a 
piece of property that is eventually sold for a foreign use is 
insufficient for the sale of the component to be considered for a 
foreign use.
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Special rules with respect to related party transactions
      If property is sold to a related foreign party, the sale 
is not treated as for a foreign use unless the property is sold 
by the related foreign party to another person who is unrelated 
and is not a U.S. person and the taxpayer establishes to the 
satisfaction of the Secretary that such property is for a 
foreign use. Income derived in connection with services 
provided to a related party who is not located in the United 
States is not treated as foreign-derived deduction eligible 
income unless the taxpayer establishes to the satisfaction of 
the Secretary that such service is not substantially similar to 
services provided by the related party to persons located 
within the United States.
      For purposes of applying these rules, a related party 
means any member of an affiliated group as defined in section 
1504(a) determined by substituting ``more than 50 percent'' for 
``at least 80 percent'' each place it appears and without 
regard to sections 1504(b)(2) and 1504(b)(3). Any person (other 
than a corporation) is treated as a member of the affiliated 
group if the person is controlled by members of the group 
(including any entity treated as a member of the group by 
reason of this sentence) or controls any member, with control 
being determined under the rules of section 954(d)(3).
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment, 
with clarifications and modifications that include the 
following:
             The deduction for FDII and GILTI is 
        available only to C corporations that are not RICs or 
        REITs.\1524\
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    \1524\An S corporation's taxable income is computed in the same 
manner as an individual (sec. 1363(b)) so that deductions allowable 
only to corporations, such as FDII and GILTI, do not apply. See Report 
by the House Committee on Ways and Means to accompany H.R. 6055, 
Subchapter S Revision Act of 1982, H. Rep. No. 97-826, p. 14; and 
Report by the Senate Committee on Finance to accompany H.R. 6055, 
Subchapter S Revision Act of 1982, S. Rep. 97-640, p. 15.
       The Code provides that deductions for corporations provided in 
part VIII of subchapter B, which include the deduction for FDII and 
GILTI, do not apply in computing investment company taxable income 
(sec. 852(b)(2)(C)) or real estate investment trust taxable income 
(sec. 857(b)(2)(A)). Therefore, the deduction for FDII and GILTI does 
not apply to RICs or REITs.
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             The deduction for GILTI applies to the 
        amount treated as a dividend received by a domestic 
        corporation under section 78 that is attributable to 
        the corporation's GILTI amount under new section 951A.
             The exclusions from deduction eligible 
        income are clarified.
             The definition of deemed tangible income 
        return is clarified.
Illustration of effective tax rates on FDII and GILTI
      Under a 21-percent corporate tax rate, and as a result of 
the deduction for FDII and GILTI, the effective tax rate on 
FDII is 13.125 percent and the effective U.S. tax rate on GILTI 
(with respect to domestic corporations) is 10.5 percent for 
taxable years beginning after December 31, 2017, and before 
January 1, 2026.\1525\ Since only a portion (80 percent) of 
foreign tax credits are allowed to offset U.S. tax on GILTI, 
the minimum foreign tax rate, with respect to GILTI, at which 
no U.S. residual tax is owed by a domestic corporation is 
13.125 percent.\1526\ If the foreign tax rate on GILTI is zero 
percent, then the U.S. residual tax rate on GILTI is 10.5 
percent. Therefore, as foreign tax rates on GILTI range between 
zero percent and 13.125 percent, the total combined foreign and 
U.S. tax rate on GILTI ranges between 10.5 percent and 13.125 
percent. At foreign tax rates greater than or equal to 13.125 
percent, there is no residual U.S. tax owed on GILTI, so that 
the combined foreign and U.S. tax rate on GILTI equals the 
foreign tax rate.
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    \1525\Due to the reduction in the effective U.S. tax rate resulting 
from the deduction for FDII and GILTI, the conferees expect the 
Secretary to provide, as appropriate, regulations or other guidance 
similar to that under amended section 965 with respect to the 
determination of basis adjustments under section 705(a)(1) and the 
determination of gain or loss under section 986(c).
    \1526\13.125 percent equals the effective GILTI rate of 10.5 
percent divided by 80 percent. If the foreign tax rate on GILTI is 
13.125 percent, and domestic corporations are allowed a credit equal to 
80 percent of foreign taxes paid, then the post-credit foreign tax rate 
on GILTI equals 10.5 percent (= 13.125 percent  80 percent), 
which equals the effective GILTI rate of 10.5 percent. Therefore, no 
U.S. residual tax is owed.
---------------------------------------------------------------------------
      For domestic corporations in taxable years beginning 
after December 31, 2025, the effective tax rate on FDII is 
16.406 percent and the effective U.S. tax rate on GILTI is 
13.125 percent. The minimum foreign tax rate, with respect to 
GILTI, at which no U.S. residual tax is owed is 16.406 
percent.\1527\
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    \1527\If the foreign tax rate on GILTI is zero percent, then the 
U.S. residual tax rate on GILTI is 13.125 percent. Therefore, as 
foreign tax rates on GILTI range between zero percent and 16.406 
percent, the total combined foreign and U.S. tax rate on GILTI ranges 
between 13.125 percent and 16.406 percent. At foreign tax rates greater 
than or equal to 16.406 percent, there is no residual U.S. tax on 
GILTI, and the combined foreign and U.S. tax rate on GILTI equals the 
foreign tax rate.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.
2. Special rules for transfers of intangible property from controlled 
        foreign corporations to United States shareholders (sec. 14203 
        of the Senate amendment and new sec. 966 of the Code)

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      For certain distributions of intangible property held by 
a CFC on the date of enactment of this provision, the fair 
market value of the property on the date of the distribution is 
treated as not exceeding the adjusted basis of the property 
immediately before the distribution. If the distribution is not 
a dividend, a U.S. shareholder's adjusted basis in the stock of 
the CFC with respect to which the distribution is made is 
increased by the amount (if any) of the distribution that 
would, but for this provision, be includible in gross income. 
The adjusted basis of the property in the hands of the U.S. 
shareholder immediately after the distribution is the adjusted 
basis immediately before the distribution, reduced by the 
amount of the increase (if any) described previously.
      For purposes of the provision, intangible property means 
intangible property as described in section 936(h)(3)(B) and 
computer software as described in section 197(e)(3)(B).
      The provision applies to distributions that are (1) 
received by a domestic corporation from a CFC with respect to 
which it is a U.S. shareholder and (2) made by the CFC before 
the last day of the third taxable year of the CFC beginning 
after December 31, 2017.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders in which or 
with which such taxable years of foreign corporations end.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

         C. Modifications Related to Foreign Tax Credit System

1. Repeal of section 902 indirect foreign tax credits; determination of 
        section 960 credit on current year basis (sec. 4101 of the 
        House bill, sec. 14301 of the Senate amendment, and secs. 902 
        and 960 of the Code)

                               HOUSE BILL

      The provision repeals the deemed-paid credit with respect 
to dividends received by a domestic corporation that owns 10 
percent or more of the voting stock of a foreign corporation.
      A deemed-paid credit is provided with respect to any 
income inclusion under subpart F. The deemed-paid credit is 
limited to the amount of foreign income taxes properly 
attributable to the subpart F inclusion. Foreign income taxes 
under the proposal include income, war profits, or excess 
profits taxes paid or accrued by the CFC to any foreign country 
or possession of the United States. The proposal eliminates the 
need for computing and tracking cumulative tax pools.
      Additionally, the provision provides rules applicable to 
foreign taxes attributable to distributions from previously 
taxed earnings and profits, including distributions made 
through tiered-CFCs.
      The Secretary is granted authority under the proposal to 
provide regulations and other guidance as may be necessary and 
appropriate to carry out the purposes of this proposal. It is 
anticipated that the Secretary would provide regulations with 
rules for allocating taxes similar to rules in place for 
purposes of determining the allocation of taxes to specific 
foreign tax credit baskets.\1528\ Under such rules, taxes are 
not attributable to an item of subpart F income if the base 
upon which the tax was imposed does not include the item of 
subpart F income. For example, if foreign law exempts a certain 
type of income from its tax base, no deemed-paid credit results 
from the inclusion of such income as subpart F. Tax imposed on 
income that is not included in subpart F income, is not 
considered attributable to subpart F income.
---------------------------------------------------------------------------
    \1528\See Treas. Reg. sec. 1.904-6(a).
---------------------------------------------------------------------------
      In addition to the rules described in this section, the 
proposal makes several conforming amendments to various other 
sections of the Code reflecting the repeal of section 902 and 
the modification of section 960. These conforming amendments 
include amending the section 78 gross-up provision to apply 
solely to taxes deemed paid under the amended section 960.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill, 
except with respect to certain conforming amendments.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill with the 
following modifications. The conference agreement applies the 
existing language of section 78, which treats the gross-up as a 
dividend to the domestic corporation, to foreign income taxes 
deemed paid under section 960(a), (b), and (d) (without regard 
to the phrase `80 percent of' in section 960(d)(1), except with 
respect to section 245 and new section 245A (i.e., the deemed 
dividend would not receive the benefit of the participation 
exemption). The conference agreement further revises new 
section 250(a)(1)(B) to apply the deduction with respect to 
inclusions under new section 951A to the section 78 gross-up.
      In addition, the conference agreement eliminates the 
dividend reference in section 907(c)(3)(A) without disturbing 
the application of section 907(c)(3)(A) to certain interest 
payments. The conference agreement also amends section 1293(f) 
to provide section 960(a) credits to an inclusion of income of 
a qualified electing fund (as defined in section 1295) 
consistent with present law.
      The conference agreement makes certain conforming 
amendments to sections 901(m), 904, 907, and 909, including 
replacing the reference to section 960(b) in section 904(k) to 
section 960(c), striking the reference to section 902 in 
section 904(d)(2)(E), and preserving the current applicability 
of sections 901(m) and 909 to all taxpayers who claim foreign 
tax credits, including qualified electing funds.
      Effective date.--The provision applies to taxable years 
taxable years of foreign corporations beginning after December 
31, 2017, and to taxable years of United States shareholders in 
which or with which such taxable years of foreign corporations 
end.
2. Source of income from sales of inventory determined solely on basis 
        of production activities (sec. 4102 of the House bill, sec. 
        14304 of the Senate amendment, and sec. 863(b) of the Code)

                               HOUSE BILL

      Under the provision, gains, profits, and income from the 
sale or exchange of inventory property produced partly in, and 
partly outside, the United States is allocated and apportioned 
on the basis of the location of production with respect to the 
property. For example, income derived from the sale of 
inventory property to a foreign jurisdiction is sourced wholly 
within the United States if the property was produced entirely 
in the United States, even if title passage occurred elsewhere. 
Likewise, income derived from inventory property sold in the 
United States, but produced entirely in another country, is 
sourced in that country even if title passage occurs in the 
United States. If the inventory property is produced partly in, 
and partly outside, the United States, however, the income 
derived from its sale is sourced partly in the United States.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is identical to the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
3. Separate foreign tax credit limitation basket for foreign branch 
        income (sec. 14302 of the Senate amendment and sec. 904 of the 
        Code)

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision requires foreign branch income to be 
allocated to a specific foreign tax credit basket. Foreign 
branch income is the business profits of a United States person 
which are attributable to one or more QBUs in one or more 
foreign countries.
      Under this provision, business profits of a QBU shall be 
determined under rules established by the Secretary. Business 
profits of a QBU shall not, however, include any income which 
is passive category income.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
4. Acceleration of election to allocate interest, etc., on a worldwide 
        basis (sec. 14303 of the Senate amendment and sec. 864 of the 
        Code)

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      This provision accelerates the effective date of the 
worldwide interest allocation rules to apply to taxable years 
beginning after December 31, 2017, rather than to taxable years 
beginning after December 31, 2020.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                D. Modification of Subpart F Provisions

1. Repeal of inclusion based on withdrawal of previously excluded 
        subpart F income from qualified investment (sec. 4201 of the 
        House bill, sec. 14213 of the Senate amendment, and sec. 955 of 
        the Code)

                               HOUSE BILL

      The provision repeals section 955. As a result, a U.S. 
shareholder in a CFC that invested its previously excluded 
subpart F income in qualified foreign base company shipping 
operations is no longer required to include in income a pro 
rata share of the previously excluded subpart F income when the 
CFC decreases such investments.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and to taxable years of U.S. shareholders within which or 
with which such taxable years of foreign corporations end.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
2. Repeal of treatment of foreign base company oil related income as 
        subpart F income (sec. 4202 of the House bill, sec. 14211 of 
        the Senate amendment, and sec. 954(a) of the Code)

                               HOUSE BILL

      The provision eliminates foreign base company oil related 
income as a category of foreign base company income.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders in which or 
with which such taxable years of foreign corporations end.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders in which or 
with which such taxable years of foreign corporations end.
3. Inflation adjustment of de minimis exception for foreign base 
        company income (sec. 4203 of the House bill, sec. 14212 of the 
        Senate amendment, and sec. 954(b)(3) of the Code)

                               HOUSE BILL

      The provision amends the de minimis exception of present 
law, which permits a CFC to exclude its foreign base company 
income if the sum of its total foreign base company income and 
gross insurance income is the lesser of five percent of its 
gross income or $1,000,000. In the case of any taxable year 
beginning after 2017, the provision indexes for inflation the 
$1,000,000 de minimis amount for foreign base company income, 
with all increases rounded to the nearest multiple of $50,000.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders in which or 
with which such taxable years of foreign corporations end.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
4. Look-thru rule for related controlled foreign corporations made 
        permanent (sec. 4204 of the House bill, sec. 14217 of the 
        Senate amendment, and sec. 954(c)(6) of the Code)

                               HOUSE BILL

      The provision makes the exclusion from foreign personal 
holding company income for certain dividends, interest 
(including factoring income that is treated as equivalent to 
interest under section 954(c)(1)(E)), rents, and royalties 
received or accrued by one CFC from a related CFC permanent.
      Effective date.--The proposal is effective for taxable 
years of foreign corporations beginning after December 31, 
2019, and for taxable years of U.S. shareholders in which or 
with which such taxable years of foreign corporations end.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.
      Effective date.--The proposal is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders in which or 
with which such taxable years of foreign corporations end.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.
5. Modification of stock attribution rules for determining CFC status 
        (sec. 4205 of the House bill, sec. 14214 of the Senate 
        amendment, and secs. 318 and 958 of the Code)

                               HOUSE BILL

      The provision amends the ownership attribution rules of 
section 958(b) so that certain stock of a foreign corporation 
owned by a foreign person is attributed to a related U.S. 
person for purposes of determining whether the related U.S. 
person is a U.S. shareholder of the foreign corporation and, 
therefore, whether the foreign corporation is a CFC. In other 
words, the provision provides ``downward attribution'' from a 
foreign person to a related U.S. person in circumstances in 
which present law does not so provide. The pro rata share of a 
CFC's subpart F income that a U.S. shareholder is required to 
include in gross income, however, continues to be determined 
based on direct or indirect ownership of the CFC, without 
application of the new downward attribution rule.
      It also conforms the reporting requirements of section 
6038 to require that entities that are treated as CFCs by 
reason of the rules on constructive ownership are within the 
scope of the reporting requirements.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and to taxable years of U.S. shareholders in which or 
with which such taxable years of foreign corporations end.

                            SENATE AMENDMENT

      The Senate amendment is similar to the House bill, except 
that it does not adopt the change to the reporting requirements 
of section 6038 and has a different effective date. 
Furthermore, the Senate Finance Committee explanation states 
that the provision is not intended to cause a foreign 
corporation to be treated as a controlled foreign corporation 
with respect to a U.S. shareholder as a result of attribution 
of ownership under section 318(a)(3) to a U.S. person that is 
not a related person (within the meaning of section 954(d)(3)) 
to such U.S. shareholder as a result of the repeal of section 
958(b)(4).\1529\
---------------------------------------------------------------------------
    \1529\Committee Print, Reconciliation Recommendations Pursuant to 
H. Con. Res. 71, S. Prt. 115-20, (December 2017), p. 378, as reprinted 
on the website of the Senate Budget Committee, available at https://
www.budget.senate.gov/taxreform.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for the last 
taxable year of foreign corporations beginning before January 
1, 2018 and each subsequent year of such foreign corporations 
and for the taxable years of U.S. shareholders in which or with 
which such taxable years of foreign corporations end.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment. In 
adopting this provision, the conferees intend to render 
ineffective certain transactions that are used to as a means of 
avoiding the subpart F provisions. One such transaction 
involves effectuating ``de-control'' of a foreign subsidiary, 
by taking advantage of the section 958(b)(4) rule that 
effectively turns off the constructive stock ownership rules of 
318(a)(3) when to do otherwise would result in a U.S. person 
being treated as owning stock owned by a foreign person. Such a 
transaction converts former CFCs to non-CFCs, despite 
continuous ownership by U.S. shareholders.
      Effective date.--The provision is effective for the last 
taxable year of foreign corporations beginning before January 
1, 2018 and each subsequent year of such foreign corporations 
and for the taxable years of U.S. shareholders in which or with 
which such taxable years of foreign corporations end.
6. Modification of definition of United States shareholder (sec. 14215 
        of the Senate amendment and sec. 951 of the Code)

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision expands the definition of U.S. shareholder 
under subpart F to include any U.S. person who owns 10 percent 
or more of the total value of shares of all classes of stock of 
a foreign corporation.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders with or within 
which such taxable years of foreign corporations end.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
7. Elimination of requirement that corporation must be controlled for 
        30 days before subpart F inclusions apply (sec. 4206 of the 
        House bill, sec. 14216 of the Senate amendment, and sec. 
        951(a)(1) of the Code)

                               HOUSE BILL

      The provision eliminates the requirement that a 
corporation must be controlled for an uninterrupted period of 
30 days before subpart F inclusions apply.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders with or within 
which such taxable years of foreign corporations end.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders with or within 
which such taxable years of foreign corporations end.
8. Current year inclusion of foreign high return amounts or global 
        intangible low-taxed income by United States shareholders (sec. 
        4301 of the House bill, sec. 14201 of the Senate amendment, and 
        secs. 78 and 960 and new sec. 951A of the Code)

                               HOUSE BILL

In general
      Under the provision, a U.S. shareholder of any CFC must 
include in gross income for a taxable year an amount equal to 
50 percent of its foreign high return amount (``FHRA'') in a 
manner generally similar to inclusions of subpart F income. 
FHRA means, with respect to any U.S. shareholder for the 
shareholder's taxable year, the shareholder's net CFC tested 
income less an amount equal to the excess (if any) of (1) the 
applicable percentage of the aggregate of the shareholder's pro 
rata share of the qualified business asset investment 
(``QBAI'') of each CFC with respect to which it is a U.S. 
shareholder over (2) the amount of interest expense taken into 
account in determining the shareholder's net CFC tested income. 
The applicable percentage is the Federal short-term rate 
(determined under section 1274(d) for the month in which such 
shareholder's taxable year ends) plus seven percentage points.
      The formula for FHRA, which is calculated at the U.S. 
shareholder level, is generally:\1530\
---------------------------------------------------------------------------
    \1530\If the amount of interest expense exceeds [(7% + AFR) 
 QBAI], then the quantity in brackets in the formula equals 
zero in the determination of FHRA.

FHRA = Net CFC Tested Income - [(7% + AFR)  QBAI - 
---------------------------------------------------------------------------
Interest Expense]

where AFR is the short-term Federal rate.
Net CFC tested income
      Net CFC tested income means, with respect to any U.S. 
shareholder, the excess of the aggregate of its pro rata share 
of the tested income of each CFC with respect to which it is a 
U.S. shareholder over the aggregate of its pro rata share of 
the tested loss of each CFC with respect to which it is a U.S. 
shareholder. Pro rata shares are determined under the rules of 
section 951(a)(2).
      The formula for net CFC tested income, which is 
calculated at the U.S. shareholder level, is:

Net CFC Tested Income = Sum of CFC Tested Income - Sum of CFC 
Tested Loss

      The tested income of a CFC means the excess (if any) of 
the gross income of the corporation determined without regard 
to certain exceptions to tested income, over deductions 
(including taxes) properly allocable to such gross income. The 
exceptions to tested income are: (1) the corporation's ECI if 
the income is subject to tax;\1531\ (2) any gross income taken 
into account in determining the corporation's subpart F income; 
(3) any amount, except as otherwise provided by the Secretary, 
that qualifies for CFC look-through treatment, but only to the 
extent that any deduction allowable for the payment or accrual 
of such amount does not result in a reduction of the FHRA of 
any U.S. shareholder (determined without regard to such 
amount); (4) any gross income excluded as foreign personal 
holding company income by reason of the exceptions for active 
financing income and active insurance income as well as the 
exception for dealers under section 954(c)(2)(C); (5) any gross 
income excluded from foreign base company income or insurance 
income by reason of the high-tax exception under section 
954(b)(4); (6) any dividend received from a related person (as 
defined in section 954(d)(3)); and (7) any commodities gross 
income.
---------------------------------------------------------------------------
    \1531\ECI includes income that is subject to the election described 
in section 4303 of the House bill and new sec. 4491. As a result, 
income that a CFC derives from certain sales to the U.S. market is 
excluded from the FHRA calculation and is subject to new sec. 4491, to 
the extent that the sales are made to a related party.
---------------------------------------------------------------------------
      Commodities gross income means (1) gross income of a 
corporation (or of a partnership in which the corporation is a 
partner) from the disposition of commodities that it has 
produced or extracted and that are commodities described in 
sections 475(e)(2)(A) and 475(e)(2)(D), and (2) the gross 
income of the corporation from the disposition of property that 
gives rise to income described in (1). Commodities income is 
intended to include any foreign oil and gas extraction 
income\1532\ and any foreign oil related income.\1533\
---------------------------------------------------------------------------
    \1532\Sec. 907(c)(1).
    \1533\Sec. 907(c)(2).
---------------------------------------------------------------------------
      The tested loss of a CFC means the excess (if any) of the 
deductions (including taxes) properly allocable to the 
corporation's gross income determined without regard to the 
tested income exceptions over the amount of such gross income.
Qualified business asset investment
      QBAI means, with respect to any CFC for a taxable year, 
the aggregate of its adjusted bases (determined as of the close 
of the taxable year and after any adjustments with respect to 
such taxable year) in specified tangible property used in its 
trade or business and with respect to which a deduction is 
allowable under section 168. Specified tangible property means 
any tangible property to the extent such property is used in 
the production of tested income or tested loss. The adjusted 
basis in any property is determined without regard to any 
provision of law that is enacted after the date of enactment of 
this provision, unless such law specifically and directly 
amends this provision's definition.
      If a CFC holds an interest in a partnership as of the 
close of the corporation's taxable year, the corporation takes 
into account its distributive share of the aggregate of the 
partnership's adjusted bases (determined as of such date in the 
hands of the partnership) in tangible property held by the 
partnership to the extent that such property is used in the 
trade or business of the partnership, is of a type with respect 
to which a deduction is allowable under section 168, and is 
used in the production of tested income or tested loss 
(determined with respect to the corporation's distributive 
share of income or loss with respect to such property). The 
corporation's distributive share of the adjusted basis of any 
property is the corporation's distributive share of income and 
loss with respect to such property.
      For purposes of determining QBAI, the Secretary is 
authorized to issue anti-avoidance regulations or other 
guidance as the Secretary determines appropriate, including 
regulations or other guidance that provide for the treatment of 
property if the property is transferred or held temporarily, or 
if avoidance was a factor in the transfer or holding of the 
property.
Foreign tax credits and coordination with subpart F
            Deemed-paid credit for taxes properly attributable to 
                    tested income
      For any FHRA included in the gross income of a domestic 
corporation, the corporation is deemed to have paid foreign 
income taxes equal to 80 percent of its foreign high return 
percentage multiplied by the aggregate tested foreign income 
taxes paid or accrued by each CFC with respect to which the 
corporation is a U.S. shareholder. The foreign high return 
percentage is the corporation's FHRA divided by the aggregate 
amount of its pro rata share of the tested income of each CFC 
with respect to which it is a U.S. shareholder. Tested foreign 
income taxes are the foreign income taxes paid or accrued by a 
CFC that are properly attributable to gross income taken into 
account in determining tested income or tested loss.
      The provision creates a separate foreign tax credit 
basket for the FHRA inclusion, with no carryforward or 
carryback available for excess credits. For purpose of 
determining the foreign tax credit limitation, any FHRA is not 
general category income, and income that can be classified as 
both a FHRA and passive category income is considered passive 
category income. The taxes deemed to have been paid are treated 
as an increase in the FHRA for purposes of section 78, 
determined by taking into account 100 percent of its foreign 
high return percentage multiplied by the aggregate tested 
foreign income taxes.
            Coordination with subpart F
      Although FHRA inclusions do not constitute subpart F 
income, FHRA inclusions are generally treated similarly to 
subpart F inclusions. Thus, with respect to any CFC any pro 
rata amount from which is taken into account in determining the 
FHRA included in gross income of a U.S. shareholder, such 
amount, except as otherwise provided by the Secretary, is 
treated in the same manner as an amount included under section 
951(a)(1)(A) for purposes of applying sections 168(h)(2)(B), 
535(b)(10), 851(b), 904(h)(1), 959, 961, 962, 993(a)(1)(E), 
996(f)(1), 1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 
6654(d)(2)(D), and 6655(e)(4).
      The provision requires that the amount of FHRA included 
by a U.S. corporation be allocated across each CFC with respect 
to which it is a U.S. shareholder. The portion of the FHRA 
treated as being with respect to a CFC equals zero for a 
foreign corporation with tested loss and, for a foreign 
corporation with tested income, the portion of the FHRA which 
bears the same ratio to the total FHRA as the shareholder's pro 
rata amount of the tested income of the foreign corporation 
bears to the aggregate amount of the shareholder's pro rata 
share of the tested income of each CFC with respect to which it 
is a U.S. shareholder.
      Tested losses taken into account in determining a U.S. 
shareholder's FHRA cannot also reduce the shareholder's 
inclusions in gross income under section 951(a)(1)(A) by reason 
of the earnings and profits limitation in section 952(c). 
Accordingly, a U.S. shareholder's amount included in gross 
income under section 951(a)(1)(A) with respect to a CFC is 
determined by increasing the earnings and profits of such 
corporation (solely for purposes of determining such amount) by 
an amount that bears the same ratio (not greater than 1) to the 
shareholder's pro rata share of the tested loss of such CFC as 
(1) the aggregate amount of the shareholder's pro rata share of 
the tested income of each CFC with respect to which it is a 
U.S. shareholder bears to (2) the aggregate amount of the 
shareholder's tested loss of each CFC with respect to which it 
is a U.S. shareholder. If this increase in earnings and profits 
results in an incremental inclusion under section 951(a)(1)(A, 
the CFC will increases its earnings and profits described in 
section 959(c)(2) by that amount and decrease its earnings and 
profits in section 959(c)(3) by that amount (even if that 
results in, or increases, a deficit).
Taxable years for which persons are treated as U.S. shareholders of a 
        CFC
      For purposes of the FHRA inclusion, a U.S. shareholder of 
a CFC is treated as a U.S. shareholder of the corporation for 
any taxable year of the shareholder if a taxable year of the 
corporation ends in or with the taxable year of such person and 
the person owns (within the meaning of section 958(a)) stock in 
the corporation on the last day in the taxable year of the 
corporation on which the corporation is a CFC. A corporation is 
generally treated as a CFC for any taxable year if the 
corporation is a CFC at any time during the taxable year.
Examples
      The following examples illustrate how FHRA is calculated. 
The examples are highly stylized and are not meant to represent 
actual taxpayer scenarios.
Example 1: Two Wholly Owned CFCs, Each with Tested Income
      Assume a domestic corporation, US1, wholly owns two CFCs, 
CFC1 and CFC2. These are the only CFCs with respect to which 
US1 is a U.S. shareholder. Assume that the applicable 
percentage to be applied to QBAI is 10 percent. The following 
table includes more information about CFC1 and CFC2. Assume 
that their foreign sales income are items of gross income 
included in the computation of tested income, and that all 
expenses are allocable to their foreign sales income. Also 
assume a U.S. corporate tax rate of 20 percent, and that the 
foreign tax rates faced by CFC1 and CFC2 are applied evenly 
across each of its sources of income.
Facts for Example 1

------------------------------------------------------------------------
                                         CFC1                CFC2
------------------------------------------------------------------------
  Gross Income
    Foreign Sales Income........  $300..............  $2,000
    Subpart F Income............  $100..............  $0
    Commodities Income..........  $600..............  $0
  Expenses
    Operating Expenses..........  $200..............  $300
    Net Income..................  $800..............  $1,700
    Foreign Tax Rate............  20 percent........  5 percent
    QBAI........................  $500..............  $0
------------------------------------------------------------------------

            CFC-level calculations of tested income and QBAI
      CFC1 earns foreign sales income of $300 and has 
deductions of $220 (= $20 of taxes plus $200 of operating 
expenses) allocable to its foreign sales income. Therefore, it 
has tested income of $80 (= $300 - $220) and tested foreign 
income tax of $20 (= 20%  $100). CFC1 has QBAI of 
$500.
      CFC2 earns foreign sales income of $2,000 and has 
deductions of $385 (= $85 of taxes plus $300 of operating 
expenses) allocable to its foreign sales income. Therefore, it 
has tested income of $1,615 (= $2,000 - $385) and tested 
foreign income tax of $85 (= 5%  $1,700). CFC2 has 
QBAI of $0.
            U.S.-shareholder-level calculation of FHRA and tax 
                    liability
      US1 has net CFC tested income of $1,695, which is the sum 
of CFC1's tested income of $80 and CFC2's tested income of 
$1,615. Its pro rata share of QBAI is $500 (= [100%  
$500] + [100%  $0]). No interest expense is taken into 
account in determining US1's net CFC tested income. Therefore, 
US1's FHRA = $1,695 - ([10%  $500] - $0) = $1,645.
      US1 receives a deemed-paid credit equal to 80 percent of 
its foreign high return percentage multiplied by the aggregate 
tested foreign income taxes paid or accrued by CFC1 and CFC2. 
Its foreign high return percentage is 97.1 percent (= FHRA/
Aggregate Tested Income = $1,645/$1,695). The aggregate tested 
foreign income taxes paid or accrued by CFC1 and CFC2 is $105 
(= $20 + $85). Therefore, US1's deemed-paid credit is 80 
percent  97.1 percent  $105 = $81.52.
      US1 includes 50 percent of its FHRA and 50 percent of its 
section 78 gross-up in gross income, or $873.45 (= 50% 
 [$1,645 + $101.90]).\1534\ The tentative U.S. tax 
owed on this income is the U.S. corporate tax rate of 20 
percent applied to the total inclusion of $873.45, or $174.69.
---------------------------------------------------------------------------
    \1534\The section 78 gross-up amount = 100 percent  97.1 
percent  $105 = 101.90.
---------------------------------------------------------------------------
      The residual U.S. tax paid by US1 on its FHRA is its 
tentative U.S. tax of $174.69 less its deemed-paid credit of 
$81.52, or $93.17.
Example 2: Variant of Example 1, With Tested Loss
      Example 2 generally has the same facts as example 1, 
except that CFC2 earns foreign sales of $360. This means that 
CFC2 has tested income (before taking into account taxes) of 
$60. Assume, for simplicity, that it still pays foreign taxes 
of $85 with respect to the $360 of foreign sales, so that its 
tested loss is $25 (= $60 - $85) and its tested foreign income 
tax is $85.
      Like in Example 1, CFC1 has tested income of $80 and 
tested foreign income tax of $20.
            U.S.-shareholder-level calculation of FHRA and tax 
                    liability
      US1 has net CFC tested income of $55, which is CFC1's 
tested income of $80 less CFC2's tested loss of $25. Its pro 
rata share of QBAI is $500 (= [100%  $500] + [100% 
 $0]). No interest expense is taken into account in 
determining US1's net CFC tested income. Therefore, US1's FHRA 
= $55 - (10%  $500) - $0 = $5.
      US1 receives a deemed-paid credit equal to 80 percent of 
its foreign high return percentage multiplied by the aggregate 
tested foreign income taxes paid or accrued by CFC1 and CFC2. 
Its foreign high return percentage is 6.25 percent (= FHRA/
Aggregate Tested Income = $5/$80). The aggregate tested foreign 
income taxes paid or accrued by CFC1 and CFC2 is $105 (= $20 + 
$85). Therefore, US1's deemed-paid credit is 80 percent 
 6.25 percent  $105 = $5.25.
      US1 includes 50 percent of its FHRA in gross income and 
50 percent of its section 78 gross-up in gross income, or $5.78 
(= 50%  [$5 + $6.56]).\1535\ The tentative U.S. tax 
owed on this income is the U.S. corporate tax rate of 20 
percent applied to the total inclusion of $5.78, or $1.16.
---------------------------------------------------------------------------
    \1535\The section 78 gross-up amount = 100 percent  6.25 
percent  $105 = $6.56.
---------------------------------------------------------------------------
      The residual U.S. tax paid by US1 on its FHRA is its 
tentative U.S. tax of $1.16 less its deemed-paid credit of 
$5.25, or $0. The amount of US1's deemed-paid credit that is 
unused, $4.09, may not be carried back or carried forward.
Example 3: CFC Look-Through Payment
      Example 3 illustrates how the FHRA calculation is applied 
when there are payments that qualify for CFC look-through 
treatment. Example 3 is limited to the calculation of the FHRA 
and does not provide calculations of the amount of U.S. or 
foreign income tax related to the FHRA.
      USCo, a domestic corporation, wholly owns US1 and US2, 
each a domestic corporation. US1 wholly owns CFC1, and US2 
wholly owns CFC2. These are the only CFCs with respect to which 
either US1 or US2 is a U.S. shareholder. Assume the applicable 
percentage for QBAI is 10 percent.
      CFC1 has total gross income of $100, none of which 
consists of a tested income exception, and has interest expense 
of $30, which it pays to CFC2. CFC1 has no other deductions and 
has QBAI of $200. As a result, CFC1 has tested income of $70 (= 
$100 of gross income less $30 of interest expense). US1's net 
CFC tested income is $70 and the applicable percentage of its 
pro rata share of QBAI is $20 (= 10%  $200). As CFC1's 
interest expense of $30 was taken into account in determining 
its tested income of $70, the excess of US1's applicable 
percentage of QBAI over this amount of interest expense is $0. 
As a result, US1's FHRA is $70 (= $70 - $0).
      CFC2 has $30 of interest income, all of which qualifies 
for CFC look-through treatment because CFC1 has no subpart F 
income. Assume CFC2 has no other gross income, no deductions, 
and no QBAI. CFC2's interest income is not includible in its 
tested income, but only to the extent a deduction for its 
payment or accrual does not reduce the FHRA of any U.S. 
shareholder. Absent the $30 interest expense deduction used in 
determining its net CFC tested income, US1's net CFC tested 
income would have been $100, and US1's FHRA would have been $80 
(= $100 - $20). With the $30 deduction, US1's net CFC's tested 
income is $70. Therefore, the deduction allowable for the 
payment or accrual of the interest reduced the FHRA of US1 by 
$10, so only $20 of CFC2's interest income is excluded from 
tested income. As a result, CFC2 has tested income of $10 (= 
$30 - $20), and US2 has net CFC tested income of $10 (= $10 - 
$0).
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders in which or 
with which such taxable years of foreign corporations end.

                            SENATE AMENDMENT

In general
      Under the provision, a U.S. shareholder of any CFC must 
include in gross income for a taxable year its global 
intangible low-taxed income (``GILTI'') in a manner generally 
similar to inclusions of subpart F income. GILTI means, with 
respect to any U.S. shareholder for the shareholder's taxable 
year, the excess (if any) of the shareholder's net CFC tested 
income over the shareholder's net deemed tangible income 
return. The shareholder's net deemed tangible income return is 
an amount equal to 10 percent of the aggregate of the 
shareholder's pro rata share of the qualified business asset 
investment (``QBAI'') of each CFC with respect to which it is a 
U.S. shareholder.
      The formula for GILTI, which is calculated at the U.S. 
shareholder level, is:

GILTI = Net CFC Tested Income - (10%  QBAI)
Net CFC tested income
      Net CFC tested income means, with respect to any U.S. 
shareholder, the excess of the aggregate of the shareholder's 
pro rata share of the tested income of each CFC with respect to 
which it is a U.S. shareholder over the aggregate of its pro 
rata share of the tested loss of each CFC with respect to which 
it is a U.S. shareholder. Pro rata shares are determined under 
the rules of section 951(a)(2).
      The formula for net CFC tested income, which is 
calculated at the U.S. shareholder level, is:

Net CFC Tested Income = Sum of CFC Tested Income - Sum of CFC 
Tested Loss

      The tested income of a CFC means the excess (if any) of 
the gross income of the corporation--determined without regard 
to certain exceptions to tested income--over deductions 
(including taxes) properly allocable to such gross income 
(referred to in this document as ``tested gross income''). The 
exceptions to tested income are: (1) the corporation's ECI 
under section 952(b); (2) any gross income taken into account 
in determining the corporation's subpart F income; (3) any 
gross income excluded from foreign base company income or 
insurance income by reason of the high-tax exception under 
section 954(b)(4); (4) any dividend received from a related 
person (as defined in section 954(d)(3)); and (5) any foreign 
oil and gas extraction income (as defined in section 
907(c)(1)).
      The tested loss of a CFC means the excess (if any) of 
deductions (including taxes) properly allocable to the 
corporation's gross income--determined without regard to the 
tested income exceptions--over the amount of such gross income.
Qualified business asset investment
      QBAI means, with respect to any CFC for a taxable year, 
the average of the aggregate of its adjusted bases, determined 
as of the close of each quarter of the taxable year, in 
specified tangible property used in its trade or business and 
of a type with respect to which a deduction is generally 
allowable under section 167. The adjusted basis in any property 
must be determined using the alternative depreciation system 
under current section 168(g), notwithstanding any provision of 
law (or any other section of the Senate amendment) which is 
enacted after the date of enactment of this provision (unless 
such later enacted law specifically and directly amends this 
provision's definition).
      Specified tangible property means any property used in 
the production of tested income.\1536\ If such property was 
used in the production of both tested income and income that is 
not tested income (i.e., dual-use property), the property is 
treated as specified tangible property in the same proportion 
that the amount of tested gross income produced with respect to 
the property bears to the total amount of gross income produced 
with respect to the property.\1537\
---------------------------------------------------------------------------
    \1536\Specified tangible property does not include property used in 
the production of tested loss, so that a CFC that has a tested loss in 
a taxable year does not have QBAI for the taxable year.
    \1537\For example, if a building produces $1,000 of tested gross 
income and $250 of subpart F income for a taxable year, then 80 percent 
(= $1,000/$1,250) of a domestic corporation's average adjusted basis in 
the building is included in QBAI for that taxable year.
---------------------------------------------------------------------------
      For purposes of determining QBAI, the Secretary is 
authorized to issue anti-avoidance regulations or other 
guidance as the Secretary determines appropriate, including 
regulations or other guidance that provide for the treatment of 
property if the property is transferred or held temporarily, or 
if avoidance was a factor in the transfer or holding of the 
property.
Coordination with subpart F
      Although GILTI inclusions do not constitute subpart F 
income, GILTI inclusions are generally treated similarly to 
subpart F inclusions. Thus they are generally treated in the 
same manner as amounts included under section 951(a)(1)(A) for 
purposes of applying sections 168(h)(2)(B), 535(b)(10), 
904(h)(1), 959, 961, 962, 993(a)(1)(E), 996(f)(1), 1248(b)(1), 
1248(d)(1), 6501(e)(1)(C), 6654(d)(2)(D), and 6655(e)(4). 
However, the Secretary may provide rules for coordinating the 
GILTI inclusion with provisions of law in which the 
determination of subpart F income is required to be made at the 
CFC level.
      The provision requires that the amount of GILTI included 
by a U.S. shareholder be allocated across each CFC with respect 
to which it is a U.S. shareholder. The portion of GILTI treated 
as being with respect to a CFC equals zero for a CFC with no 
tested income and, for a CFC with tested income, the portion of 
GILTI which bears the same ratio to the total amount of GILTI 
as the U.S. shareholder's pro rata amount of tested income of 
the CFC bears to the aggregate amount of the U.S. shareholder's 
pro rata amount of the tested income of each CFC with respect 
to which it is a U.S. shareholder. For a CFC with tested 
income, the following formula expresses how to determine the 
portion of GILTI treated as being with respect to the CFC:


where Share of CFC's Tested Income is the U.S. shareholder's 
pro rata amount of the tested income of a CFC and Share of Agg. 
CFC Tested Income is the aggregate amount of the U.S. 
shareholder's pro rata amount of the tested income of each CFC 
with respect to which it is a U.S. shareholder.
      For purposes of the GILTI inclusion, a person is treated 
as a U.S. shareholder of a CFC for any taxable year only if 
such person owns (within the meaning of section 958(a)) stock 
in the corporation on the last day, in such year, on which the 
corporation is a CFC. A corporation is generally treated as a 
CFC for any taxable year if the corporation is a CFC at any 
time during the taxable year.
Deemed-paid credit for taxes properly attributable to tested income
      For any amount of GILTI included in the gross income of a 
domestic corporation, the corporation's deemed-paid credit 
equals 80 percent of the product of the corporation's inclusion 
percentage multiplied by the aggregate tested foreign income 
taxes paid or accrued, with respect to tested income, by each 
CFC with respect to which the domestic corporation is a U.S. 
shareholder.
      The inclusion percentage means, with respect to any 
domestic corporation, the ratio (expressed as a percentage) of 
such corporation's GILTI amount divided by the aggregate amount 
of its pro rata share of the tested income of each CFC with 
respect to which it is a U.S. shareholder (referred to as 
``aggregate tested income'' in the formulas below). Tested 
foreign income taxes means, with respect to any domestic 
corporation that is a U.S. shareholder of a CFC, the foreign 
income taxes paid or accrued by the CFC that are properly 
attributable to the CFC's tested income.\1538\
---------------------------------------------------------------------------
    \1538\Tested foreign income taxes do not include any foreign income 
tax paid or accrued by a CFC that is properly attributable to the CFC's 
tested loss (if any).
---------------------------------------------------------------------------
      The deemed-paid credit with respect to the GILTI 
inclusion can be expressed in the following formula:


      The provision creates a separate foreign tax credit 
basket for GILTI, with no carryforward or carryback available 
for excess credits. For purposes of determining the foreign tax 
credit limitation, GILTI is not general category income, and 
income that is both GILTI and passive category income is 
considered passive category income. As described in section 
14301 of the Senate amendment and new section 78, the taxes 
deemed to have been paid are treated as an increase in GILTI 
for purposes of section 78, determined by taking into account 
100 percent of the product of the inclusion percentage and 
aggregate tested foreign income taxes (instead of 80 percent in 
the determination of the deemed-paid credit). Therefore, the 
section 78 gross-up can be expressed in the following formula:


      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders in which or 
with which such taxable years of foreign corporations end.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
provision, with clarifications and modifications that include 
the following.
Net deemed tangible income return
      The conference agreement modifies, along lines similar to 
an approach taken in the House bill provision, the calculation 
of net deemed tangible income return for purposes of 
determining GILTI. Net deemed tangible income return is, with 
respect to any U.S. shareholder for a taxable year, the excess 
(if any) of 10 percent of the aggregate of its pro rata share 
of the QBAI of each CFC with respect to which it is a U.S. 
shareholder over the amount of interest expense taken into 
account in determining its net CFC tested income for the 
taxable year to the extent that the interest expense exceeds 
the interest income properly allocable to the interest expense 
that is taken into account in determining its net CFC tested 
income. As a result, the formula for GILTI in the conference 
agreement is generally:\1539\
---------------------------------------------------------------------------
    \1539\If the amount of interest expense exceeds 10%  QBAI, 
then the quantity in brackets in the formula equals zero in the 
determination of GILTI.

GILTI = Net CFC Tested Income - [(10%  QBAI) - 
---------------------------------------------------------------------------
Interest Expense]

where Interest Expense is defined and limited in the manner 
described above.
Computation of tested income and tested loss
      For purposes of computing deductions (including taxes) 
properly allocable to gross income included in tested income or 
tested loss with respect to a CFC, the deductions are allocated 
to such gross income following rules similar to the rules of 
section 954(b)(5) (or to which such deductions would be 
allocable if there were such gross income).
Calculation of pro rata shares
      For purposes of determining pro rata shares in the 
computation of a U.S. shareholder's GILTI amount, a person is 
treated as a U.S. shareholder of a CFC for any taxable year of 
such person only if the person owns (within the meaning of 
section 958(a)) stock in the foreign corporation on the last 
day in the taxable year of the foreign corporation on which the 
foreign corporation is a CFC.
Qualified business asset investment
      For purposes of determining a CFC's QBAI and its adjusted 
basis in specified tangible property, the adjusted basis is 
determined by allocating the depreciation deduction with 
respect to the property ratably to each day during the period 
in the taxable year to which the depreciation relates. In 
addition, if a CFC holds an interest in a partnership at the 
close of the CFC's taxable year, the CFC takes into account its 
distributive share of the aggregate of the partnership's 
adjusted bases (determined as of such date in the hands of the 
partnership) in tangible property held by the partnership to 
the extent that the property is used in the trade or business 
of the partnership, is of a type with respect to which a 
deduction is allowable under section 167, and is used in the 
production of tested income (determined with respect to the 
CFC's distributive share of income with respect to the 
property). The CFC's distributive share of the adjusted basis 
of any property is the CFC's distributive share of income with 
respect to the property.
Regulatory authority to address abuse
      The conferees intend that non-economic transactions 
intended to affect tax attributes of CFCs and their U.S. 
shareholders (including amounts of tested income and tested 
loss, tested foreign income taxes, net deemed tangible income 
return, and QBAI) to minimize tax under this provision be 
disregarded. For example, the conferees expect the Secretary to 
prescribe regulations to address transactions that occur after 
the measurement date of post-1986 earnings and profits under 
amended section 965, but before the first taxable year for 
which new section 951A applies, if such transactions are 
undertaken to increase a CFC's QBAI.
      Effective date.--The provision is effective for taxable 
years of foreign corporations beginning after December 31, 
2017, and for taxable years of U.S. shareholders in which or 
with which such taxable years of foreign corporations end.
9. Limitation on deduction of interest by domestic corporations which 
        are members of an international group (sec. 4302 of the House 
        bill, sec. 14221 of the Senate amendment, and new sec. 163(n) 
        of the Code)

                               HOUSE BILL

      The provision limits the amount of U.S. interest expense 
that a domestic corporation which is a member of an 
international financial reporting group can deduct to the sum 
of the member's interest income plus the allowable percentage 
of 110 percent of net interest expense. An international 
financial reporting group is a group that: (1) includes at 
least one foreign corporation engaged in a U.S. trade or 
business or at least one domestic corporation and one foreign 
corporation at any time during the group's reporting year, (2) 
prepares consolidated financial statements in accordance with 
U.S. Generally Accepted Accounting Principles (``GAAP''), 
International Financial Reporting Standards (``IFRS''), or any 
other comparable method identified by the Secretary,\1540\ and 
(3) reports in such statements average annual gross receipts in 
excess of $100,000,000 (determined in the aggregate with 
respect to all entities which are part of such group) for the 
three-reporting-year period ending with such reporting year.
---------------------------------------------------------------------------
    \1540\The International Financial Reporting Standards are a set of 
accounting standards commonly used for the preparation of financial 
statements of public companies listed in countries outside the United 
States.
---------------------------------------------------------------------------
      The allowable percentage is the ratio of a corporation's 
allocable share of the international financial reporting 
group's net interest expense over such corporation's reported 
net interest expense. A corporation's allocable share of an 
international financial reporting group's net interest expense 
is determined based on the corporation's share of the group's 
earnings (computed by adding back net interest expense, taxes, 
depreciation, and amortization) as reflected in the group's 
consolidated financial statements. A corporation's reported net 
interest expense is its net interest expense reported in the 
books and records used to prepare the group's consolidated 
financial statements. For international financial reporting 
groups that do not prepare consolidated financial statements 
under U.S. GAAP, IFRS, or any other comparable method 
identified by the Secretary and which are filed with the United 
States Securities and Exchange Commission, the provision 
provides a hierarchy of other audited consolidated financial 
statements that may be relied upon by such group.
      The provision applies to partnerships at the partnership 
level under rules similar to the rules of section 3301 of the 
bill. The provision also applies to foreign corporations 
engaged in a U.S. trade or business. A U.S. consolidated group 
is considered a single corporation under this provision.
      The amount of any interest not allowed as a deduction for 
any taxable year by reason of this provision or section 3301 of 
the bill (depending on whichever imposes the lower limitation 
for the amount allowed as an interest deduction with respect to 
such taxable year) can be carried forward as interest (and as 
business interest for purposes of section 3301 of the bill) for 
up to five years.
      The following example illustrates the coordination of 
this provision with section 3301 of the bill in a context 
involving a partnership.
Example
            FP, a foreign corporation, wholly owns USS, a 
        domestic corporation. FP and USS each own 50 percent of 
        PS, a partnership. FP, USS, and PS prepare audited 
        consolidated financial statements in accordance with 
        U.S. GAAP that are used for internal management 
        purposes and under which average annual gross receipts 
        for the 3-reporting-year period ending with the current 
        reporting year in excess of $100 million are reported. 
        During the current reporting year, the FP-USS-PS group 
        has consolidated EBITDA of 300 and consolidated 
        interest expense of 50. During that period, USS has 
        EBITDA of 50 (determined without regard to 
        distributions from PS), reported interest expense of 
        25, business interest of 30, and adjusted taxable 
        income (determined without regard to USS's distributive 
        share of PS's non-separately stated taxable income or 
        loss) of 40. Also during that period, PS has EBITDA of 
        150, reported interest expense of 15, business interest 
        of 20, and adjusted taxable income of 120.
            PS's business interest is deductible only to the 
        extent it does not exceed the limitations in each of 
        section 163(j) (as provided in section 3301 of the 
        bill) and section 163(n) (as provided in section 4302 
        of the bill). PS's limitation under section 163(j) is 
        36, which equals 30 percent of its adjusted taxable 
        income of 120 (i.e., 30% 120 = 36). PS's limitation 
        under section 163(n) is 22, which equals the allowable 
        percentage (i.e., 160% = 50  150 / 300 / 15, 
        not greater than 100%) of 110 percent of PS's business 
        interest (i.e., 22 = 110%  20). Therefore, all 
        20 of PS's business interest is deductible. PS's excess 
        amount under section 163(j) (i.e., 36 - 20 = 16) and 
        excess EBITDA under section 163(n) (i.e., 150 - 300 
         15 / 50 = 60) flow through to its partners.
      Similarly, USS's business interest is deductible only to 
the extent it does not exceed the limitations in each of 
section 163(j) and section 163(n). USS's limitation under 
section 163(j) is 20, which equals 30 percent of the sum of its 
adjustable taxable income of 40 (determined without regard to 
USS's distributive share of PS's non-separately stated taxable 
income or loss) or 12 (i.e., 30%  40 = 12) plus USS's 
distributive share of PS's excess amount under section 
163(j)(3)(B) (i.e., 50%  16 = 8). USS's limitation 
under section 163(n) is 17.60, which equals the allowable 
percentage (i.e., 53% = 50  (50 + 30) / 300 / 25) of 
110 percent of USS's business interest (i.e., 33 = 110% 
 30) after taking into account USS's distributive 
share of PS's excess EBITDA under section 163(n) (i.e., 50% 
 60 = 30). Therefore, USS may deduct 17.60 of its 30 
of business interest in the current year.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                            SENATE AMENDMENT

      For any domestic corporation that is a member of a 
worldwide affiliated group (hereinafter referred to as the 
``U.S. corporate members''), the provision reduces the 
deduction for interest paid or accrued by the corporation by 
the product of the net interest expense of the domestic 
corporation multiplied by the debt-to-equity differential 
percentage of the worldwide affiliated group. Net interest 
expense means the excess (if any) of: (1) interest paid or 
accrued by the taxpayer during the taxable year, over (2) the 
amount of interest includible in the gross income of the 
taxpayer for the taxable year.\1541\
---------------------------------------------------------------------------
    \1541\The Secretary is provided is regulatory authority to provide 
for adjustments in determining the amount of net interest expense.
---------------------------------------------------------------------------
      A worldwide affiliated group is one or more chains of 
corporations, connected through stock ownership with a common 
parent that would qualify as an affiliated group under section 
1504(a), with two differences. First, the ownership threshold 
of section 1504(a)(2) is applied using 50 percent rather than 
80 percent. Second, the restrictions on inclusion described in 
sections 1504(b)(2), (b)(3) and (b)(4) are disregarded for 
purposes of identifying the worldwide affiliated group.
      The debt-to-equity differential percentage means, with 
respect to any worldwide affiliated group, the excess domestic 
indebtedness of the group divided by the total indebtedness of 
the domestic corporations that are members of the group. All 
U.S. corporate members of the worldwide affiliated group are 
treated as one member when determining whether the group has 
excess domestic indebtedness as a result of a debt-to-equity 
differential. Excess domestic indebtedness is the amount by 
which the total indebtedness of the U.S. corporate members 
exceeds 110 percent of the total indebtedness those members 
would hold if their total indebtedness to total equity ratio 
equaled the ratio of total indebtedness to total equity for the 
worldwide affiliated group. Total equity means, with respect to 
one or more corporations, the excess (if any) of: (1) the money 
and all other assets of such corporations, over (2) the total 
indebtedness of such corporations. For purposes of this 
computation, intragroup debt and equity interests are 
disregarded, and assets of the U.S. corporate members of the 
worldwide affiliated group exclude any interest held by any 
U.S. corporate member in any foreign corporation that is a 
member of the group.
      The amount of any interest not allowed as a deduction for 
any taxable year by reason of this provision or new section 
163(j) (depending on whichever imposes the lower limitation 
with respect to such taxable year) can be carried forward 
indefinitely.
      The Secretary is provided regulatory authority to provide 
rules for: (1) the prevention of the avoidance of this 
provision, (2) adjustments in the case of corporations which 
are members of an affiliated group as may be appropriate to 
carry out the purposes of the provision, (3) the coordination 
of this provision with section 884, (4) the treatment of 
partnership indebtedness, allocation of partnership debt, 
interest, or distributive shares, and (5) the coordination of 
this provision with new section 163(j).
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
or the Senate amendment provision.

                     E. Prevention of Base Erosion

1. Base erosion using deductible cross-border payments between 
        affiliated companies (sec. 4303 of the House bill and new secs. 
        4491 and 6038E of the Code; sec. 14401 of the Senate amendment 
        and secs. 6038A and 6038C and new secs. 59A and 59B of the 
        Code)

                               HOUSE BILL

In general
      This provision imposes an excise tax on certain amounts 
paid by U.S. payors to certain related foreign recipients to 
the extent the amounts are deductible by the U.S. payor. 
However, the excise tax does not apply if the foreign recipient 
elects to be subject to U.S. income tax on the amounts 
received. In calculating the U.S. income tax liability imposed 
under such an election, deemed expenses are allowed as a 
deduction. A foreign tax credit of 80% of applicable foreign 
credits are allowed against the U.S. tax liability imposed by 
this provision if an election is made.
Excise tax
      The provision provides for an excise tax on specified 
amounts paid or incurred by a domestic corporation to a foreign 
corporation if both the foreign and domestic corporations are 
members of the same international financial reporting group. 
The amount of the tax is equal to 20 percent of the specified 
amounts paid or incurred. The excise tax is not imposed with 
respect to amounts that are or are deemed to be effectively 
connected with a U.S. trade or business of the foreign 
corporation. The excise tax imposed is neither deductible nor 
creditable.
      A specified amount is any amount which is allowable by 
the payor as a deduction or includible in costs of goods sold, 
or inventory, or in the basis of an amortizable or depreciable 
asset. A specified amount does not include: (i) interest, (ii) 
an amount paid or incurred for the acquisition of a security 
defined in section 475(c)(2) (without regard to the last 
sentence thereof) or a commodity defined in sections 475(e)(2), 
that is, a commodity actively traded within the meaning of 
section 1092(d)(1) or an identified hedge of such commodity, 
or, (iii) for a payor which has elected to use a services cost 
method under section 482, an amount paid or incurred for 
services if such amount is the total services cost with no 
markup.
      An international financial reporting group is any group 
of entities that prepares consolidated financial 
statements\1542\ if the average annual aggregate payment amount 
for the group for the three-year period ending in the reporting 
year exceeds $100,000,000. The annual aggregate payment amount 
means the aggregate of the specified amounts made by U.S. 
members of the group to foreign members of the group during the 
reporting year.
---------------------------------------------------------------------------
    \1542\This term is defined in new section 163(n)(4) as a financial 
statement certified as being prepared in accordance with generally 
accepted accounting principles, international financial reporting 
standards, or any other comparable method of accounting identified by 
the Secretary of the Treasury and which is: (i) a 10-K (or successor 
form), or annual statement to shareholders required to be filed with 
the United States Securities and Exchange Commission, or, if this is 
not available, (ii) an audited financial statement used for (1) credit 
purposes, (2) reporting to shareholders, partners or other proprietors, 
or to beneficiaries, or (3) any other substantial nontax purpose, or, 
if (i) and (ii) are not available, (iii) filed with any other Federal 
or State agency for nontax purposes, or, if (i), (ii), or (iii) are not 
available, a financial statement used for a purpose described in 
(ii)(1), (2) and (3), or filed with any regulatory or governmental 
body, within or outside the United States, specified by the Secretary 
of the Treasury.
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Partnerships and branches
      For purposes of this provision, a partnership is treated 
as an aggregate of its partners. Accordingly, a payment made to 
a partnership is treated as a payment to the partners, and a 
payment from a partnership is treated as a payment from the 
partners, in an amount equal to the partner's distributive 
share of the relevant item of income, gain, deduction, or loss.
      For purposes of this provision, U.S. branches are treated 
as separate entities for purposes of determining the treatment 
of payments between a branch and entities other than its owner 
and for purposes of deemed payments between a branch and its 
owner.
Election to treat payments as effectively connected income
      If a specified amount is paid or incurred by a domestic 
corporation with respect to a foreign corporation and both the 
foreign and domestic corporations are members of the same 
international financial reporting group, the foreign 
corporation may elect to take into account all such specified 
amounts as if the foreign corporation were engaged in a U.S. 
trade or business and had a permanent establishment and as if 
the payment were effectively connected with that U.S. trade or 
business and were attributable to the permanent establishment, 
irrespective of any otherwise applicable treaty. If the foreign 
corporation makes such election, the excise tax is not imposed 
and tax is imposed on a net basis on such specified amounts 
less deemed expenses. The election applies for the taxable year 
for which the election is made and all subsequent taxable years 
unless revoked with consent of the Secretary of the Treasury.
      In general, the amount treated as effectively connected 
income under this provision is treated as such for all purposes 
of the Code. For example, it is subject to the branch profit 
tax (unless otherwise reduced, such as by an applicable treaty) 
and is not subject to the excise tax under section 4371. 
However, for purposes of section 245 and new section 245A, 
these amounts are not treated as effectively connected income. 
Therefore, a distribution of earnings attributable to the 
amounts described in this provision is eligible for the 
participation DRD under new section 245A.
      The deemed expenses with respect to any specified amount 
received by a foreign corporation during any reporting year is 
the amount of expenses such that the net income ratio of the 
foreign corporation with respect to the specified amount 
(taking into account only such specified amounts and such 
deemed expenses) is equal to the net income ratio of the 
international financial reporting group determined for the 
reporting year with respect to the product line to which the 
specified amount relates. The net income ratio is the ratio of 
net income determined without regard to income taxes, interest 
income, and interest expense, divided by revenue. The net 
income ratio is calculated in accordance with the books and 
records used in preparing the group's consolidated financial 
statements. The net income ratio is determined by taking into 
account only revenues and expenses of the foreign members of 
the international financial reporting group (other than the 
members of the group that are or are treated as domestic 
corporations for purposes of the provision) derived from, or 
incurred with respect to, persons that are not members of the 
group or members of the group that are or are treated as 
domestic corporations for purposes of the provision.
      The following example illustrates the determination of a 
foreign affiliate's deemed expenses under the provision:
            According to the books and records (after taking 
        into account intercompany transactions otherwise 
        eliminated in consolidation) of an international 
        financial reporting group consisting of US, FS1, and 
        FS2, a domestic corporation, US has third-party 
        revenues of $1000, incurs third-party expenses of $500, 
        and makes a $300 payment for intercompany services to 
        its foreign affiliate, FS1. FS1 has revenues of $500 
        ($200 of which are third-party) and incurs third-party 
        expenses of $250. US's other foreign affiliate, FS2, 
        has $300 of revenues, incurs $150 of third-party 
        expenses, and makes a $100 intercompany payment to US. 
        US's entire payment to FS1 is deductible for Federal 
        income tax purposes, and FS1 elects to treat the $300 
        amount as subject to section 882(g)(1). On a 
        consolidated basis, the US-FS1-FS2 group has revenues 
        of $1500 and incurs third-party expenses of $900.
      To determine the foreign affiliate's deemed expenses, its 
foreign profit margin will be determined by reference to ratio 
of the foreign earnings before interest and taxes (``EBIT'') 
against the foreign revenues, with adjustments for related 
party inbound and outbound payments. In other words, the 
foreign affiliate's profit margin can be determined as follows:

    (GEBIT - USEBIT + RPOP - RPIP)  (GREV - USREV + RPOP)

            GEBIT is global EBIT (determined on a consolidated 
        basis), USEBIT is the domestic corporation's EBIT 
        (without regard to related party transactions), RPOP is 
        the group's related party outbound payments made from 
        domestic corporations to foreign affiliates, and RPIP 
        is the group's related party inbound payments made from 
        foreign affiliates to domestic corporations.
      In the denominator, GREV is global revenues (determined 
on a consolidated basis) and USREV is the domestic 
corporation's revenues (without regard to related party 
transactions).
      Under the aforementioned facts, the foreign affiliate's 
profit margin would be 37.5%, or

    (600 - 500 + 300 - 100)  (1500 - 1000 + 300)

      Accordingly, of the $300 payment from US to FS1, $112.50 
would be deemed to be income effectively connected to a US 
trade or business, and subject to corporate tax. The remaining 
$187.50 of the payment would be deemed expenses for which FSI 
would be allowed a deduction.
Coordination with FDAP
      Amounts treated as effectively connected income under 
this provision are not excluded from the definition of fixed or 
determinable annual or periodical (``FDAP'') income. Payments 
subject to tax under section 881 do not constitute specified 
payments under this provision except to the extent that the 
rate of tax imposed under section 881 is reduced by a bilateral 
income tax treaty.
Joint and several liability
      If there is an underpayment with respect to any taxable 
year of an electing foreign corporation which is a member of an 
international financial accounting group, each domestic 
corporation in the group is jointly and severally liable for as 
much of the underpayment as does not exceed the excess of such 
underpayment over the amount of such underpayment determined 
without regard to this rule and any penalty, addition to tax, 
or additional amount attributable to the above amount.
Foreign tax credit
      The foreign tax credit allowed under section 906(a) with 
respect to amounts taken into account as effectively connected 
income is limited to 80 percent of the amount of taxes paid or 
accrued (and determined without regard to section 906(b)(1)). 
These foreign tax credits are effectively separately basketed 
and may not be carried backwards or forwards.
Reporting
      An electing foreign corporation that receives a specified 
amount is required to report, with respect to each member of 
the international financial reporting group from which any such 
amount is received: (i) the name and taxpayer identification 
number of each member, (ii) the aggregate amounts received from 
each member, (iii) the product lines to which such amounts 
relate, the aggregate amounts relating to each product line, 
and the net income ratio for each product line, and (iv) a 
summary of changes in financial accounting methods that affect 
the computation of any net income ratio described above.
      A domestic corporation that pays or accrues a specified 
amount with respect to which a foreign corporation has made the 
election is required to make a return according to the forms 
and regulations prescribed by the Secretary of the Treasury 
containing certain information and to maintain sufficient 
records to determine the tax liability imposed by this 
provision. The information required to be provided is as 
follows: (1) the name and taxpayer identification number of the 
common parent of the international financial reporting group of 
which the domestic corporation is a member, and (2) with 
respect to a specified amount: (A) the name and taxpayer 
identification number of the recipient of the amount, (B) the 
aggregate amounts received by the recipient, (C) the product 
lines to which the amounts relate and the aggregate amounts for 
each product line, and the net income ratio for each product 
line, and (D) a summary of any changes in financial accounting 
methods that affect the computation of any net income ratio 
described in (C).
      Treasury may prescribe regulations or other guidance that 
address reporting requirements of foreign affiliates under this 
provision, such as allowing reporting or elections on a group 
basis.
      Effective date.--The provisions of this section apply to 
amounts paid or incurred after December 31, 2018.

                            SENATE AMENDMENT

In general
      Under the provision, an applicable taxpayer is required 
to pay a tax equal to the base erosion minimum tax amount for 
the taxable year. The base erosion minimum tax amount is the 
excess of 10 percent of the modified taxable income of the 
taxpayer for the taxable year over an amount equal to the 
regular tax liability (defined in section 26(b)) of the 
taxpayer for the taxable year reduced (but not below zero) by 
the excess of an amount equal to the credits allowed under 
Chapter 1 less the credit allowed under section 38 (general 
business credits) for the taxable year allocable to the 
research credit under section 41(a). For taxable years 
beginning after December 31, 2025, two changes are made, (A) 
the 10-percent provided for above is changed to 12.5-percent, 
and (B) the regular tax liability is reduced by the aggregate 
amount of the credits allowed under Chapter 1 (and no other 
adjustment is made).\1543\
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    \1543\In the case of an applicable taxpayer that is a member of an 
affiliated group (defined in section 1504(a)(1)) that includes a bank 
as defined in section 581 or a registered securities dealer defined in 
section 15(a) of the Securities Exchange Act of 1934, the rates are 11 
percent instead of the abovementioned 10 percent and 13.5 percent 
instead of the abovementioned 12.5 percent.
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      To determine its modified taxable income, the applicable 
taxpayer computes its taxable income for the year without 
regard to any base erosion tax benefit of a base erosion 
payment or base erosion percentage of any allowable net 
operating loss deduction.
Base erosion payments
      A base erosion payment generally includes any amount paid 
or accrued by a taxpayer to a foreign person that is a related 
party of the taxpayer and with respect to which a deduction is 
allowable under Chapter 1. Such payments also include any 
amount paid or accrued by the taxpayer to the related party in 
connection with the acquisition by the taxpayer from the 
related party of property of a character subject to the 
allowance of depreciation (or amortization in lieu of 
depreciation).
      Base erosion payments do not include payments for cost of 
goods sold (which is not a deduction but rather a reduction to 
income). A base erosion payment includes any amount that 
constitutes reductions in gross receipts of the taxpayer that 
is paid or accrued by the taxpayer with respect to: (1) a 
surrogate foreign corporation which is a related party of the 
taxpayer, but only if such person first became a surrogate 
foreign corporation after November 9, 2017, or (2) a foreign 
person that is a member of the same expanded affiliated group 
as the surrogate foreign corporation. A surrogate foreign 
corporation has the meaning given in section 7874(a)(2), but 
does not include a foreign corporation treated as a domestic 
corporation under section 7874(b).
      A base erosion payment does not apply to any amount paid 
or accrued by a taxpayer for services if such services meet the 
requirements for eligibility for use of the services cost 
method under section 482,\1544\ determined without regard to 
the requirement that the services not contribute significantly 
to fundamental risks of business success or failure and such 
amount constitutes the total services cost with no markup.
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    \1544\Described in Treas. Reg. sec. 1.482-9(b).
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      Any qualified derivative payment is not treated as a base 
erosion payment. A qualified derivative payment means any 
payment made by a taxpayer pursuant to a derivative with 
respect to which the taxpayer: (i) recognizes gain or loss as 
if such derivative were sold for its fair market value on the 
last business day of the taxable year (and such additional 
times as are required by this title or the taxpayer's method of 
accounting), (ii) treats any gain or loss so recognized as 
ordinary, and (iii) treats the character of all items of 
income, deduction, gain or loss with respect to a payment 
pursuant to the derivative as ordinary.
      No payment is treated as a qualified derivative payment 
unless the taxpayer includes in the information required to be 
reported under section 6038B(b)(2) with respect to such taxable 
year such information as is necessary to identify the payments 
to be so treated and such other information as the Secretary of 
the Treasury determines necessary to carry out the provision.
      The rule for qualified derivative payments does not apply 
if such payment would be treated as a base erosion payment if 
it were not made pursuant to a derivative, including any 
interest, royalty, or service payment, or in the case of a 
contract which has derivative and nonderivative components, the 
payment is properly allocable to the nonderivative component.
      For these purposes, the term derivative means any 
contract (including any option, forward contract, futures 
contract, short position, swap, or similar contract) the value 
of which, or any payment or other transfer with respect to 
which, is (directly or indirectly) determined by reference to 
one or more of the following: (i) any share of stock of a 
corporation, (ii) any evidence of indebtedness, (iii) any 
commodity which is actively traded, (iv) any currency, (v) any 
rate, price, amount, index, formula, or algorithm. Except as 
otherwise provided by the Secretary of the Treasury, American 
depository receipts and similar instruments with respect to 
shares of stock in foreign corporations are treated as shares 
of stock in such foreign corporations.
      A base erosion tax benefit means: (i) any deduction 
allowed under Chapter 1 for the taxable year with respect to a 
base erosion payment, (ii) in the case of a base erosion 
payment with respect to the purchase of property of a character 
subject to the allowance for depreciation (or amortization in 
lieu of depreciation), any deduction allowed in Chapter 1 for 
depreciation or amortization in lieu of depreciation with 
respect to the property acquired with such payment, or (iii) 
any reduction in gross receipts with respect to a payment 
described above with respect to a surrogate foreign corporation 
(as defined there) in computing gross income of the taxpayer 
for the taxable year.
      Any base erosion tax benefit attributable to any base 
erosion payment on which tax is imposed by sections 871 or 881 
and with respect to which tax has been deducted and withheld 
under sections 1441 or 1442, is not taken into account in 
computing modified taxable income as defined above. The amount 
not taken into account in computing modified taxable income is 
reduced under rules similar to the rules under section 
163(j)(5)(B).\1545\
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    \1545\As in effect before the date of enactment of Tax Cuts and 
Jobs Act.
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      The base erosion percentage means for any taxable year, 
the percentage determined by dividing the aggregate amount of 
base erosion tax benefits of the taxpayer for the taxable year 
by the aggregate amount of the deductions allowable to the 
taxpayer under Chapter 1 for the taxable year, taking into 
account base erosion tax benefits described above and by not 
taking into account any deduction allowed under sections 172, 
245A or 250 for the taxable year.
Applicable taxpayers and related parties
      Applicable taxpayer means with respect to any taxable 
year, a taxpayer: (A) which is a corporation other than a 
regulated investment company, a real estate investment trust, 
or an S corporation; (B) the average annual gross receipts of 
the corporation for the three-taxable-year period ending with 
the preceding taxable year are at least $500 million, and (C) 
the base erosion percentage (as defined above) of the 
corporation for the taxable year is four percent or higher.
      In the case of a foreign person the gross receipts of 
which are taken into account for purposes of this provision, 
only gross receipts which are taken into account in determining 
income effectively connected with the conduct of a trade or 
business within the United States is taken into account. If a 
foreign person's gross receipts are aggregated with a U.S. 
person's gross receipts for reasons described in the 
aggregation rules below, the preceding sentence does not apply 
to the gross receipts of any U.S. person which are aggregated 
with the taxpayer's gross receipts.
      All persons treated as a single employer under section 
52(a) are treated as one person for purposes of this provision, 
except that in applying section 1563 for purposes of section 
52, the exception for foreign corporations under section 
1563(b)(2)(C) is disregarded (called the ``aggregation 
rules'').
      For purposes of this provision, foreign person has the 
meaning given in section 6038A(c)(3).
      Related party means: (i) any 25-percent owner of the 
taxpayer, (ii) any person who is related to the taxpayer or any 
25-percent owner of the taxpayer, within the meaning of 
sections 267(b) or 707(b)(1), and (iii) any other person 
related to the taxpayer within the meaning of section 482. For 
these purposes, section 318 regarding constructive ownership of 
stock applies to these related party rules except that 10-
percent is substituted for 50-percent in section 318(a)(2)(C), 
and for these purposes section 318(a)(3)(A), (B) and (C) do not 
cause a United States person to own stock owned by a person who 
is not a United States person.
      The provision provides that the Secretary of the Treasury 
is to prescribe such regulations or other guidance necessary or 
appropriate, including regulations providing for such 
adjustments to the application of this section necessary to 
prevent avoidance of the provision, including through: (1) the 
use of unrelated persons, conduit transactions, or other 
intermediaries, or (2) transactions or arrangements designed in 
whole or in part: (A) to characterize payments otherwise 
subject to this provision as payments not subject to this 
provision, or (B) to substitute payments not subject to this 
provision for payments otherwise subject to this provision.
Information reporting requirements\1546\
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    \1546\Section 15006 of the bill (and new section 6050Z) establishes 
certain reporting requirements. These reporting requirements are 
effective for taxable years beginning after December 31, 2024, and 
continue to be required regardless of whether the revenue requirement 
is met. Any taxpayer who makes a payment to a foreign person who is a 
related party (as such term is defined in section 14401 of the bill and 
new section 59A) of the taxpayer during the taxable year is required to 
make a return, according to forms and regulations prescribed by the 
Secretary, setting forth (1) the amount of such payments by type and 
separately stated and (2) any amount paid that results in a reduction 
of gross receipts to the taxpayer (e.g., cost of goods sold).
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      The provision authorizes the Secretary of the Treasury to 
prescribe additional reporting requirements under section 6038A 
relating to: (A) the name, principal place of business, and 
country or countries in which organized or resident of each 
person which: (i) is a related party to the reporting 
corporation, and (ii) had any transaction with the reporting 
corporation during its taxable year, (B) the manner of relation 
between the reporting corporation and the person referred to in 
(A), and (C) transactions between the reporting corporation and 
each related foreign person.
      In addition, for purposes of information reporting under 
sections 6038A and 6038C, if the reporting corporation or the 
foreign corporation to which section 6038C applies is an 
applicable taxpayer under this provision, the information that 
may be required includes: (A) base erosion payments paid or 
accrued during the taxable year by the taxpayer to a foreign 
person which is a related party of the taxpayer, (B) such 
information as the Secretary of the Treasury finds necessary to 
determine the base erosion minimum amount of the taxpayer for 
the taxable year, and (C) such other information as the 
Secretary of the Treasury determines is necessary.
      The penalties provided for under sections 6038A(D)(1) and 
(2) are both increased to $25,000.
      Effective date.--The provision applies to base erosion 
payments paid or accrued in taxable years beginning after 
December 31, 2017.

                          CONFERENCE AGREEMENT

      The provision in the conference agreement follows the 
Senate amendment with some changes, as follows.
In general
      Under the provision, an applicable taxpayer is required 
to pay a tax equal to the base erosion minimum tax amount for 
the taxable year. The base erosion minimum tax amount is the 
excess of 10 percent\1547\ of the modified taxable income of 
the taxpayer for the taxable year over an amount equal to the 
regular tax liability (defined in section 26(b)) of the 
taxpayer for the taxable year reduced (but not below zero) by 
the excess (if any) of the credits allowed under Chapter 1 
against such regular tax liability over the sum of: (1) the 
credit allowed under section 38 for the taxable year which is 
properly allocable to the research credit determined under 
section 41(a), plus (2) the portion of the applicable section 
38 credits not in excess of 80 percent of the lesser of the 
amount of such credits or the base erosion minimum tax amount 
(determined without regard to this clause (2)). For taxable 
years beginning after December 31, 2025, two changes are made, 
(A) the 10-percent provided for above is changed to 12.5-
percent, and (B) the regular tax liability is reduced by the 
aggregate amount of the credits allowed under Chapter 1 (and no 
other adjustment is made).\1548\
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    \1547\5 percent rate applies for one year for base erosion payments 
paid or accrued in taxable years beginning after December 31, 2017.
    \1548\In the case of a taxpayer that is a member of an affiliated 
group (defined in section 1504(a)(1)) that includes a bank as defined 
in section 581 or a registered securities dealer defined in section 
15(a) of the Securities Exchange Act of 1934, the rates are 6 percent 
instead of 5 percent, 11 percent instead of 10 percent and 13.5 percent 
instead of 12.5 percent.
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      Applicable section 38 credits means the credit allowed 
under section 38 for the taxable year which is properly 
allocable to: (A) the low-income housing credit determined 
under section 42(a), (B) the renewable electricity production 
credit determined under section 45(a), and (C) the investment 
credit determined under section 46, but only to the extent 
properly allocable to the energy credit determined under 
section 48.
      To determine its modified taxable income, the applicable 
taxpayer computes its taxable income for the year without 
regard to any base erosion tax benefit with respect to any base 
erosion payment or the base erosion percentage of any allowable 
net operating loss deduction allowed under section 172 for the 
taxable year.
Base erosion payments
      A base erosion payment means any amount paid or accrued 
by a taxpayer to a foreign person that is a related party of 
the taxpayer and with respect to which a deduction is allowable 
under Chapter 1. Such payments include any amount paid or 
accrued by the taxpayer to the related party in connection with 
the acquisition by the taxpayer from the related party of 
property of a character subject to the allowance of 
depreciation (or amortization in lieu of depreciation). A base 
erosion payment includes any premium or other consideration 
paid or accrued by the taxpayer to a foreign person which is a 
related party of the taxpayer for any reinsurance payments 
taken into account under sections 803(a)(1)(B) or 832(b)(4)(A).
      Base erosion payments do not include any amount that 
constitutes reductions in gross receipts including payments for 
costs of goods sold. However, base erosion payment includes any 
amount that constitutes reductions in gross receipts of the 
taxpayer that is paid or accrued by the taxpayer with respect 
to: (1) a surrogate foreign corporation which is a related 
party of the taxpayer, but only if such person first became a 
surrogate foreign corporation after November 9, 2017, or (2) a 
foreign person that is a member of the same expanded affiliated 
group as the surrogate foreign corporation. A surrogate foreign 
corporation has the meaning given in section 7874(a)(2), but 
does not include a foreign corporation treated as a domestic 
corporation under section 7874(b).
      A base erosion payment does not include any amount paid 
or accrued by a taxpayer for services if such services meet the 
requirements for eligibility for use of the services cost 
method described in Treas. Reg. sec. 1.482-9, as in effect as 
of the date of enactment of TCJA, without regard to the 
requirement that the services not contribute significantly to 
fundamental risks of business success or failure and only if 
the payments are made for services that have no markup 
component.
      Any qualified derivative payment is not treated as a base 
erosion payment. A qualified derivative payment means any 
payment made by a taxpayer pursuant to a derivative with 
respect to which the taxpayer: (i) recognizes gain or loss as 
if such derivative were sold for its fair market value on the 
last business day of the taxable year (and such additional 
times as are required by this title or the taxpayer's method of 
accounting), (ii) treats any gain or loss so recognized as 
ordinary, and (iii) treats the character of all items of 
income, deduction, gain or loss with respect to a payment 
pursuant to the derivative as ordinary.
      No payment is treated as a qualified derivative payment 
unless the taxpayer includes in the information required to be 
reported under section 6038B(b)(2) with respect to such taxable 
year such information as is necessary to identify the payments 
to be so treated and such other information as the Secretary of 
the Treasury determines necessary to carry out the provision.
      The rule for qualified derivative payments does not apply 
if a payment with respect to a derivative is in substance, or 
is disguising, the kind of payment that would be treated as a 
base erosion payment if it were not made pursuant to a 
derivative, including any interest, royalty, or service 
payment, (or any other payment subject to this provision) or in 
the case of a contract which has derivative and nonderivative 
components, the payment is properly allocable to the 
nonderivative component.
      For these purposes, the term derivative means any 
contract (including any option, forward contract, futures 
contract, short position, swap, or similar contract) the value 
of which, or any payment or other transfer with respect to 
which, is (directly or indirectly) determined by reference to 
one or more of the following: (i) any share of stock of a 
corporation, (ii) any evidence of indebtedness, (iii) any 
commodity which is actively traded, (iv) any currency, (v) any 
rate, price, amount, index, formula, or algorithm. Except as 
otherwise provided by the Secretary of the Treasury, American 
depository receipts and similar instruments with respect to 
shares of stock in foreign corporations are treated as shares 
of stock in such foreign corporations. The term derivative does 
not include any item described in paragraphs (i) through (v) 
above nor shall the term `derivative' include any insurance, 
annuity, or endowment contract issued by an insurance company 
to which subchapter L applies (or issued by any foreign 
corporation to which such subchapter would apply if such 
foreign corporation were a domestic corporation).
      A base erosion tax benefit means: (i) any deduction 
allowed under Chapter 1 for the taxable year with respect to a 
base erosion payment, (ii) in the case of a base erosion 
payment with respect to the purchase of property of a character 
subject to the allowance for depreciation (or amortization in 
lieu of depreciation), any deduction allowed in Chapter 1 for 
depreciation or amortization in lieu of depreciation with 
respect to the property acquired with such payment, or (iii) 
any reduction in gross receipts with respect to a payment 
described above with respect to a surrogate foreign corporation 
(as defined there) in computing gross income of the taxpayer 
for the taxable year.
      Any base erosion tax benefit attributable to any base 
erosion payment on which tax is imposed by sections 871 or 881 
and with respect to which tax has been deducted and withheld 
under sections 1441 or 1442, is not taken into account in 
computing modified taxable income as defined above. The amount 
not taken into account in computing modified taxable income is 
reduced under rules similar to the rules under section 
163(j)(5)(B).\1549\
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    \1549\As in effect before the date of enactment of TCJA.
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      The base erosion percentage means for any taxable year, 
the percentage determined by dividing the aggregate amount of 
base erosion tax benefits of the taxpayer for the taxable year 
by the aggregate amount of the deductions allowable to the 
taxpayer under Chapter 1 for the taxable year, taking into 
account base erosion tax benefits described above and by not 
taking into account any deduction allowed under sections 172, 
245A or 250 for the taxable year, any deduction for amounts 
paid or accrued for services to which the exception for the 
services cost method (as described above) applies, and any 
deduction for qualified derivative payments which are not 
treated as a base erosion payment as described above.
Applicable taxpayers and related parties
      Applicable taxpayer means with respect to any taxable 
year, a taxpayer: (A) which is a corporation other than a 
regulated investment company, a real estate investment trust, 
or an S corporation; (B) the average annual gross receipts of 
the corporation for the three-taxable-year period ending with 
the preceding taxable year are at least $500 million, and (C) 
the base erosion percentage (as defined above) of the 
corporation for the taxable year is three percent or 
higher.\1550\
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    \1550\In the case of an applicable taxpayer that is a member of an 
affiliated group (defined in section 1504(a)(1)) that includes a bank 
as defined in section 581 or a registered securities dealer defined in 
section 15(a) of the Securities Exchange Act of 1934, the base erosion 
percentage of which is two percent or higher.
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      In the case of a foreign person the gross receipts of 
which are taken into account for purposes of this provision, 
only gross receipts which are taken into account in determining 
income effectively connected with the conduct of a trade or 
business within the United States is taken into account. If a 
foreign person's gross receipts are aggregated with a U.S. 
person's gross receipts for reasons described in the 
aggregation rules below, the preceding sentence does not apply 
to the gross receipts of any U.S. person which are aggregated 
with the taxpayer's gross receipts.
      All persons treated as a single employer under section 
52(a) are treated as one person for purposes of this provision, 
except that in applying section 1563 for purposes of section 
52, the exception for foreign corporations under section 
1563(b)(2)(C) is disregarded (called the ``aggregation 
rules'').
      For purposes of this provision, foreign person has the 
meaning given in section 6038A(c)(3).
      Related party means: (i) any 25-percent owner of the 
taxpayer, (ii) any person who is related to the taxpayer or any 
25-percent owner of the taxpayer, within the meaning of 
sections 267(b) or 707(b)(1), and (iii) any other person 
related to the taxpayer within the meaning of section 482. For 
these purposes, section 318 regarding constructive ownership of 
stock applies to these related party rules except that 10-
percent is substituted for 50-percent in section 318(a)(2)(C), 
and for these purposes section 318(a)(3)(A), (B) and (C) do not 
cause a United States person to own stock owned by a person who 
is not a United States person.
      The provision provides that the Secretary of the Treasury 
is to prescribe such regulations or other guidance necessary or 
appropriate, including regulations providing for such 
adjustments to the application of this section necessary to 
prevent avoidance of the provision, including through: (1) the 
use of unrelated persons, conduit transactions, or other 
intermediaries, or (2) transactions or arrangements designed in 
whole or in part: (A) to characterize payments otherwise 
subject to this provision as payments not subject to this 
provision, or (B) to substitute payments not subject to this 
provision for payments otherwise subject to this provision.
Information reporting requirements\1551\
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    \1551\Section 15006 of the bill (and new section 6050Z) establishes 
certain reporting requirements. These reporting requirements are 
effective for taxable years beginning after December 31, 2024, and 
continue to be required regardless of whether the revenue requirement 
is met. Any taxpayer who makes a payment to a foreign person who is a 
related party (as such term is defined in section 14401 of the bill and 
new section 59A) of the taxpayer during the taxable year is required to 
make a return, according to forms and regulations prescribed by the 
Secretary, setting forth (1) the amount of such payments by type and 
separately stated and (2) any amount paid that results in a reduction 
of gross receipts to the taxpayer (e.g., cost of goods sold).
---------------------------------------------------------------------------
      The provision authorizes the Secretary of the Treasury to 
prescribe additional reporting requirements under section 6038A 
relating to: (A) the name, principal place of business, and 
country or countries in which organized or resident of each 
person which: (i) is a related party to the reporting 
corporation, and (ii) had any transaction with the reporting 
corporation during its taxable year, (B) the manner of relation 
between the reporting corporation and the person referred to in 
(A), and (C) transactions between the reporting corporation and 
each related foreign person.
      In addition, for purposes of information reporting under 
sections 6038A and 6038C, if the reporting corporation or the 
foreign corporation to which section 6038C applies is an 
applicable taxpayer under this provision, the information that 
may be required includes: (A) base erosion payments paid or 
accrued during the taxable year by the taxpayer to a foreign 
person which is a related party of the taxpayer, (B) such 
information as the Secretary of the Treasury finds necessary to 
determine the base erosion minimum amount of the taxpayer for 
the taxable year, and (C) such other information as the 
Secretary of the Treasury determines is necessary.
      The penalties provided for under sections 6038A(D)(1) and 
(2) are both increased to $25,000.
      Effective date.--The provision applies to base erosion 
payments paid or accrued in taxable years beginning after 
December 31, 2017.
2. Limitations on income shifting through intangible property transfers 
        (sec. 14222 of the bill and secs. 367, 482, and 936 of the 
        Code)

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision addresses recurring definitional and 
methodological issues that have arisen in controversies\1552\ 
in transfers of intangible property for purposes of sections 
367(d) and 482, both of which use the statutory definition of 
intangible property in section 936(h)(3)(B). The provision 
revises that definition and confirms the authority to require 
certain valuation methods. It does not modify the basic 
approach of the existing transfer pricing rules with regard to 
income from intangible property.
---------------------------------------------------------------------------
    \1552\Veritas v. Commissioner, 133 T.C. No. 14 (December 10, 2009), 
non-acq., IRB 2010-49 (December 6, 2010). (stating that including 
goodwill and going concern value within the definition would 
``expand[]'' that definition, and that ``taxpayers are merely required 
to be compliant, not prescient''); Amazon v. Commissioner, 148 T.C. No. 
8 (2017) (holding that ``workforce in place, going concern value, 
goodwill, and what trial witnesses described as `growth options' and 
corporate `resources' or `opportunities''' all fell outside the 
definition under present law).
---------------------------------------------------------------------------
      Under the provision, workforce in place, goodwill (both 
foreign and domestic), and going concern value are intangible 
property within the meaning of section 936(h)(3)(B), as is the 
residual category of ``any similar item'' the value of which is 
not attributable to tangible property or the services of an 
individual. The flush language at the end of that subparagraph 
is removed, to make clear that the source or amount of value is 
not relevant to whether property that is one of the specified 
types of intangible property is within the scope of the 
definition.
      The provision clarifies the authority of the Secretary to 
specify the method to be used to determine the value of 
intangible property, both with respect to outbound 
restructurings of U.S. operations and to intercompany pricing 
allocations,\1553\ by amending 482 as well as the grant of 
regulatory authority under section 367 regarding the use of 
aggregate basis valuation and the application of the realistic 
alternative principle.
---------------------------------------------------------------------------
    \1553\Secs. 367(d) and 482.
---------------------------------------------------------------------------
      With respect to aggregate basis valuation, the provision 
requires use of that method of valuation in the case of 
transfers of multiple intangible properties in one or more 
related transactions if the Secretary determines that an 
aggregate basis achieves a more reliable result than an asset-
by-asset approach. The provision is consistent with the 
position that the additional value that results from the 
interrelation of intangible assets can be properly attributed 
to the underlying intangible assets in the aggregate, where 
doing so yields a more reliable result. This approach is also 
consistent with Tax Court decisions in cases outside of the 
section 482 context, where collections of multiple, related 
intangible assets were viewed by the Tax Court in the 
aggregate.\1554\ Finally, it is also consistent with the cost-
sharing regulations.\1555\
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    \1554\See, e.g., Kraft Foods Co. v. Commissioner, 21 T.C. 513 
(1954) (thirty-one related patents must be valued as a group and the 
useful life for depreciation should be based on the average of the 
patents' useful lives); Standard Conveyor Co. v. Commissioner, 25 
B.T.A. 281, p. 283 (1932) (``[I]t is evident that it is impossible to 
value these seven patents separately. Their value, as in the case of 
many groups of patents representing improvements on the prior art, 
appears largely to consist of their combination.''); Massey-Ferguson, 
Inc. v. Commissioner, 59 T.C. 220 (1972) (taxpayer who abandoned a 
distribution network of contracts with separate distributorships was 
entitled to an abandonment loss for the entire network in the taxable 
year during which the last of the contracts was terminated because that 
was the year in which the entire intangible value was lost).
    \1555\See Treas. Reg. sec. 1.482-7(g)(2)(iv) (if multiple 
transactions in connection with a cost-sharing arrangement involve 
platform, operating and other contributions of resources, capabilities 
or rights that are reasonably anticipated to be interrelated, then 
determination of the arm's-length charge for platform contribution 
transactions and other transactions on an aggregate basis may provide 
the most reliable measure of an arm's-length result).
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      The provision codifies use of the realistic alternative 
principles to determine valuation with respect to intangible 
property transactions. The realistic alternative principle is 
predicated on the notion that a taxpayer will only enter into a 
particular transaction if none of its realistic alternatives is 
economically preferable to the transaction under consideration. 
For example, under the existing regulations provide the IRS 
with the ability to determine an arm's-length price by 
reference to a transaction (such as the owner of intangible 
property using it to make a product itself) that is different 
from the transaction that was actually completed (such as the 
owner of that same intangible property licensing the 
manufacturing rights and then buying the product from the 
licensee).
      Effective date.--The provision applies to transfers in 
taxable years beginning after December 31, 2017. No inference 
is intended with respect to application of section 936(h)(3)(B) 
or the authority of the Secretary to provide by regulation for 
such application with respect to taxable years beginning before 
January 1, 2018.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
3. Certain related party amounts paid or accrued in hybrid transactions 
        or with hybrid entities (sec. 14223 of the Senate amendment and 
        sec. 267A of the Code)

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision denies a deduction for any disqualified 
related party amount paid or accrued pursuant to a hybrid 
transaction or by, or to, a hybrid entity. A disqualified 
related party amount is any interest or royalty paid or accrued 
to a related party to the extent that: (1) there is no 
corresponding inclusion to the related party under the tax law 
of the country of which such related party is a resident for 
tax purposes or is subject to tax, or (2) such related party is 
allowed a deduction with respect to such amount under the tax 
law of such country. A disqualified related party amount does 
not include any payment to the extent such payment is included 
in the gross income of a U.S. shareholder under section 951(a). 
A related party for these purposes is determined under the 
rules of section 954(d)(3), except that such section applies 
with respect to the payor as opposed to the CFC otherwise 
referred to in such section.
      A hybrid transaction is any transaction, series of 
transactions, agreement, or instrument one or more payments 
with respect to which are treated as interest or royalties for 
Federal income tax purposes and which are not so treated for 
purposes of the tax law of the foreign country of which the 
recipient of such payment is resident for tax purposes or is 
subject to tax. A hybrid entity is any entity which is either: 
(1) treated as fiscally transparent for Federal income tax 
purposes but not so treated for purposes of the tax law of the 
foreign country of which the entity is resident for tax 
purposes or is subject to tax, or (2) treated as fiscally 
transparent for purposes of the tax law of the foreign country 
of which the entity is resident for tax purposes or is subject 
to tax but not so treated for Federal income tax purposes.
      The provision further provides that the Secretary shall 
issue regulations or other guidance as may be necessary or 
appropriate to carry out the purposes of the provision, 
including regulations or other guidance providing rules for: 
(1) denying deductions for conduit arrangements that involve a 
hybrid transaction or a hybrid entity, (2) the application of 
this provision to foreign branches, (3) applying this provision 
to certain structured transactions, (4) denying all or a 
portion of a deduction claimed for an interest or a royalty 
payment that, as a result of the hybrid transaction or entity, 
is included in the recipient's income under a preferential tax 
regime of the country of residence of the recipient and has the 
effect of reducing the country's generally applicable statutory 
tax rate by at least 25 percent, (5) denying all of a deduction 
claimed for an interest or a royalty payment if such amount is 
subject to a participation exemption system or other system 
which provides for the exclusion or deduction of a substantial 
portion of such amount, (6) rules for determining the tax 
residence of a foreign entity if the foreign entity is 
otherwise considered a resident of more than one country or of 
no country, (7) exceptions to the general rule set forth in the 
provision, and (8) requirements for record keeping and 
information in addition to any requirements imposed by section 
6038A.
      Effective date.--The provision shall apply to taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with the following modifications. The bill provides that the 
Secretary shall issue regulations or other guidance as may be 
necessary or appropriate to carry out the purposes of the 
provision for branches (domestic or foreign) and domestic 
entities, even if such branches or entities do not meet the 
statutory definition of a hybrid entity.
4. Shareholders of surrogate foreign corporations not eligible not 
        eligible for reduced rate on dividends (sec. 14225 of the 
        Senate amendment and sec. 1 of the Code)

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Any individual shareholder who receives a dividend from a 
corporation which is a surrogate foreign corporation as defined 
in section 7874(a)(2)(B), other than a foreign corporation 
which is treated as a domestic corporation under section 
7874(b), is not entitled to the lower rates on qualified 
dividends provided for in section 1(h).
      Effective date.--The provision is effective for dividends 
paid in taxable years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment 
with a modification. The modification is that the provision 
applies to dividends received from foreign corporations that 
first become surrogate foreign corporations after date of 
enactment.
      Effective date.--The provision is effective for dividends 
received after date of enactment.

     F. Provisions Related to the Possessions of the United States

1. Extension of deduction allowable with respect to income attributable 
        to domestic production activities in Puerto Rico (sec. 4401 of 
        the House bill and sec. 199 of the Code)

                              PRESENT LAW

In general
      Present law generally provides a deduction from taxable 
income (or, in the case of an individual, adjusted gross 
income) that is equal to nine percent of the lesser of the 
taxpayer's qualified production activities income or taxable 
income for the taxable year. For taxpayers subject to the 35-
percent corporate income tax rate, the nine-percent deduction 
effectively reduces the corporate income tax rate to slightly 
less than 32 percent on qualified production activities income.
      In general, qualified production activities income is 
equal to domestic production gross receipts reduced by the sum 
of: (1) the costs of goods sold that are allocable to those 
receipts; and (2) other expenses, losses, or deductions which 
are properly allocable to those receipts.
      Domestic production gross receipts generally are gross 
receipts of a taxpayer that are derived from: (1) any sale, 
exchange, or other disposition, or any lease, rental, or 
license, of qualifying production property\1556\ that was 
manufactured, produced, grown or extracted by the taxpayer in 
whole or in significant part within the United States; (2) any 
sale, exchange, or other disposition, or any lease, rental, or 
license, of qualified film\1557\ produced by the taxpayer; (3) 
any lease, rental, license, sale, exchange, or other 
disposition of electricity, natural gas, or potable water 
produced by the taxpayer in the United States; (4) construction 
of real property performed in the United States by a taxpayer 
in the ordinary course of a construction trade or business; or 
(5) engineering or architectural services performed in the 
United States for the construction of real property located in 
the United States.
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    \1556\ Qualifying production property generally includes any 
tangible personal property, computer software, and sound recordings.
    \1557\Qualified film includes any motion picture film or videotape 
(including live or delayed television programming, but not including 
certain sexually explicit productions) if 50 percent or more of the 
total compensation relating to the production of the film (including 
compensation in the form of residuals and participations) constitutes 
compensation for services performed in the United States by actors, 
production personnel, directors, and producers.
---------------------------------------------------------------------------
      The amount of the deduction for a taxable year is limited 
to 50 percent of the wages paid by the taxpayer, and properly 
allocable to domestic production gross receipts, during the 
calendar year that ends in such taxable year.\1558\ Wages paid 
to bona fide residents of Puerto Rico generally are not 
included in the definition of wages for purposes of computing 
the wage limitation amount.\1559\
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    \1558\For purposes of the provision, ``wages'' include the sum of 
the amounts of wages as defined in section 3401(a) and elective 
deferrals that the taxpayer properly reports to the Social Security 
Administration with respect to the employment of employees of the 
taxpayer during the calendar year ending during the taxpayer's taxable 
year.
    \1559\ Section 3401(a)(8)(C) excludes wages paid to U.S. citizens 
who are bona fide residents of Puerto Rico from the term wages for 
purposes of income tax withholding.
---------------------------------------------------------------------------
Rules for Puerto Rico
      When used in the Code in a geographical sense, the term 
``United States'' generally includes only the States and the 
District of Columbia.\1560\ A special rule for determining 
domestic production gross receipts, however, provides that in 
the case of any taxpayer with gross receipts from sources 
within the Commonwealth of Puerto Rico, the term ``United 
States'' includes the Commonwealth of Puerto Rico, but only if 
all of the taxpayer's Puerto Rico-sourced gross receipts are 
taxable under the Federal income tax for individuals or 
corporations.\1561\ In computing the 50-percent wage 
limitation, the taxpayer is permitted to take into account 
wages paid to bona fide residents of Puerto Rico for services 
performed in Puerto Rico.\1562\
---------------------------------------------------------------------------
    \1560\Sec. 7701(a)(9).
    \1561\ Sec. 199(d)(8)(A).
    \1562\Sec. 199(d)(8)(B).
---------------------------------------------------------------------------
      The special rules for Puerto Rico apply only with respect 
to the first 11 taxable years of a taxpayer beginning after 
December 31, 2005 and before January 1, 2017.

                               HOUSE BILL

      The provision extends the special domestic production 
activities rules for Puerto Rico to apply for the first 12 
taxable years of a taxpayer beginning after December 31, 2005 
and before January 1, 2018.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2016.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
2. Extension of temporary increase in limit on cover over of rum excise 
        taxes to Puerto Rico and the Virgin Islands (sec. 4402 of the 
        House bill and sec. 7652(f) of the Code)

                              PRESENT LAW

      A $13.50 per proof gallon\1563\ excise tax is imposed on 
distilled spirits produced in or imported into the United 
States.\1564\ The excise tax does not apply to distilled 
spirits that are exported from the United States, including 
exports to U.S. possessions (e.g., Puerto Rico and the U.S. 
Virgin Islands).\1565\
---------------------------------------------------------------------------
    \1563\A proof gallon is a liquid gallon consisting of 50 percent 
alcohol. See secs. 5002(a)(10) and (11).
    \1564\Sec. 5001(a)(1).
    \1565\Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
---------------------------------------------------------------------------
      The Code provides for cover over (payment) to Puerto Rico 
and the U.S. Virgin Islands of the excise tax imposed on rum 
imported (or brought) into the United States, without regard to 
the country of origin.\1566\ The amount of the cover over is 
limited under section 7652(f) to the lesser of (1) $10.50 per 
proof gallon ($13.25 per proof gallon before January 1, 2017) 
or (2) the excise tax imposed under section 5001(a)(1) on each 
proof gallon.
---------------------------------------------------------------------------
    \1566\Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the 
amount of excise tax collected from imports into the United States of 
articles produced in the U.S. Virgin Islands is retained by the United 
States under section 7652(b)(3).
---------------------------------------------------------------------------
      Tax amounts attributable to shipments to the United 
States of rum produced in Puerto Rico are covered over to 
Puerto Rico. Tax amounts attributable to shipments to the 
United States of rum produced in the U.S. Virgin Islands are 
covered over to the U.S. Virgin Islands. Tax amounts 
attributable to shipments to the United States of rum produced 
in neither Puerto Rico nor the U.S. Virgin Islands are divided 
and covered over to the two possessions under a formula.\1567\ 
Amounts covered over to Puerto Rico and the U.S. Virgin Islands 
are deposited into the treasuries of the two possessions for 
use as those possessions determine.\1568\ All of the amounts 
covered over are subject to the limitation.
---------------------------------------------------------------------------
    \1567\Secs. 7652(e)(2).
    \1568\Secs. 7652(a)(3), (b)(3), and (e)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision suspends for six years the $10.50 per proof 
gallon limitation on the amount of excise taxes on rum covered 
over to Puerto Rico and the U.S. Virgin Islands. Under the 
provision, the cover-over limitation of $13.25 per proof gallon 
is extended for rum brought into the United States after 
December 31, 2016 and before January 1, 2023. After December 
31, 2022, the cover over amount reverts to $10.50 per proof 
gallon.
      Effective date.--The provision applies to distilled 
spirits brought into the United States after December 31, 2016.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
3. Extension of American Samoa economic development credit (sec. 4403 
        of the House bill and sec. 119 of Pub. L. No. 109-432)

                              PRESENT LAW

      A domestic corporation that was an existing credit 
claimant with respect to American Samoa and that elected the 
application of section 936 for its last taxable year beginning 
before January 1, 2006 is allowed a credit based on the 
corporation's economic activity-based limitation with respect 
to American Samoa. The credit is not part of the Code but is 
computed based on the rules of sections 30A and 936. The credit 
is allowed for the first eleven taxable years of a corporation 
that begin after December 31, 2005, and before January 1, 2017.
      A corporation was an existing credit claimant with 
respect to a American Samoa if (1) the corporation was engaged 
in the active conduct of a trade or business within American 
Samoa on October 13, 1995, and (2) the corporation elected the 
benefits of the possession tax credit\1569\ in an election in 
effect for its taxable year that included October 13, 
1995.\1570\ A corporation that added a substantial new line of 
business (other than in a qualifying acquisition of all the 
assets of a trade or business of an existing credit claimant) 
ceased to be an existing credit claimant as of the close of the 
taxable year ending before the date on which that new line of 
business was added.
---------------------------------------------------------------------------
    \1569\For taxable years beginning before January 1, 2006, certain 
domestic corporations with business operations in the U.S. possessions 
were eligible for the possession tax credit. Secs. 27(b) and 936. This 
credit offset the U.S. tax imposed on certain income related to 
operations in the U.S. possessions. Subject to certain limitations, the 
amount of the possession tax credit allowed to any domestic corporation 
equaled the portion of that corporation's U.S. tax that was 
attributable to the corporation's non-U.S. source taxable income from 
(1) the active conduct of a trade or business within a U.S. possession, 
(2) the sale or exchange of substantially all of the assets that were 
used in such a trade or business, or (3) certain possessions 
investment. No deduction or foreign tax credit was allowed for any 
possessions or foreign tax paid or accrued with respect to taxable 
income that was taken into account in computing the credit under 
section 936. Under the economic activity-based limit, the amount of the 
credit could not exceed an amount equal to the sum of (1) 60 percent of 
the taxpayer's qualified possession wages and allocable employee fringe 
benefit expenses, (2) 15 percent of depreciation allowances with 
respect to short-life qualified tangible property, plus 40 percent of 
depreciation allowances with respect to medium-life qualified tangible 
property, plus 65 percent of depreciation allowances with respect to 
long-life qualified tangible property, and (3) in certain cases, a 
portion of the taxpayer's possession income taxes. A taxpayer could 
elect, instead of the economic activity-based limit, a limit equal to 
the applicable percentage of the credit that otherwise would have been 
allowable with respect to possession business income, beginning in 
1998, the applicable percentage was 40 percent.
    To qualify for the possession tax credit for a taxable year, a 
domestic corporation was required to satisfy two conditions. First, the 
corporation was required to derive at least 80 percent of its gross 
income for the three-year period immediately preceding the close of the 
taxable year from sources within a possession. Second, the corporation 
was required to derive at least 75 percent of its gross income for that 
same period from the active conduct of a possession business. Sec. 
936(a)(2). The section 936 credit generally expired for taxable years 
beginning after December 31, 2005.
    \1570\A corporation will qualify as an existing credit claimant if 
it acquired all the assets of a trade or business of a corporation that 
(1) actively conducted that trade or business in a possession on 
October 13, 1995, and (2) had elected the benefits of the possession 
tax credit in an election in effect for the taxable year that included 
October 13, 1995.
---------------------------------------------------------------------------
      The amount of the credit allowed to a qualifying domestic 
corporation under the provision is equal to the sum of the 
amounts used in computing the corporation's economic activity-
based limitation with respect to American Samoa, except that no 
credit is allowed for the amount of any American Samoa income 
taxes. Thus, for any qualifying corporation the amount of the 
credit equals the sum of (1) 60 percent of the corporation's 
qualified American Samoa wages and allocable employee fringe 
benefit expenses and (2) 15 percent of the corporation's 
depreciation allowances with respect to short-life qualified 
American Samoa tangible property, plus 40 percent of the 
corporation's depreciation allowances with respect to medium-
life qualified American Samoa tangible property, plus 65 
percent of the corporation's depreciation allowances with 
respect to long-life qualified American Samoa tangible 
property.
      The section 936(c) rule denying a credit or deduction for 
any possessions or foreign tax paid with respect to taxable 
income taken into account in computing the credit under section 
936 does not apply with respect to the credit allowed by the 
provision.
      For taxable years beginning after December 31, 2016 the 
credit rules are modified in two ways. First, domestic 
corporations with operations in American Samoa are allowed the 
credit even if those corporations are not existing credit 
claimants. Second, the credit is available to a domestic 
corporation (either an existing credit claimant or a new credit 
claimant) only if, in addition to satisfying all the present 
law requirements for claiming the credit, the corporation also 
has qualified production activities income (as defined in 
section 199(c) by substituting ``American Samoa'' for ``the 
United States'' in each place that latter term appears).
      In the case of a corporation that is an existing credit 
claimant with respect to American Samoa and that elected the 
application of section 936 for its last taxable year beginning 
before January 1, 2006, the credit applies to the first nine 
taxable years of the corporation which begin after December 31, 
2005, and before January 1, 2017. For any other corporation, 
the credit applies to the first three taxable years of that 
corporation which begin after December 31, 2011 and before 
January 1, 2017.

                               HOUSE BILL

      The provision extends the credit for five years to apply 
(a) in the case of a corporation that is an existing credit 
claimant with respect to American Samoa and that elected the 
application of section 936 for its last taxable year beginning 
before January 1, 2006, to the first 17 taxable years of the 
corporation which begin after December 31, 2005, and before 
January 1, 2023, and (b) in the case of any other corporation, 
to the first 11 taxable years of the corporation which begin 
after December 31, 2011 and before January 1, 2023.
      For purposes of this provision, section 119(e) of 
division A of the Tax Relief and Health Care Act of 2006\1571\ 
is amended to indicate that any reference to section 199 of the 
Code is to be treated as a reference to section 199 as in 
effect before its repeal by the House bill.
---------------------------------------------------------------------------
    \1571\Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
sec. 119.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2016.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.
G. Other International Reforms
1. Restriction on insurance business exception to the passive foreign 
        investment company rules (sec. 4501 of the House bill, sec. 
        14502 of the Senate amendment, and sec. 1297 of the Code)

                              PRESENT LAW

Passive foreign investment companies
      The Tax Reform Act of 1986\1572\ established the PFIC 
anti-deferral regime. A PFIC is generally defined as any 
foreign corporation if 75 percent or more of its gross income 
for the taxable year consists of passive income, or 50 percent 
or more of its assets consists of assets that produce, or are 
held for the production of, passive income.\1573\ Alternative 
sets of income inclusion rules apply to U.S. persons that are 
shareholders in a PFIC, regardless of their percentage 
ownership in the company. One set of rules applies to PFICs 
that are qualified electing funds, under which electing U.S. 
shareholders currently include in gross income their respective 
shares of the company's earnings, with a separate election to 
defer payment of tax, subject to an interest charge, on income 
not currently received.\1574\ A second set of rules applies to 
PFICs that are not qualified electing funds, under which U.S. 
shareholders pay tax on certain income or gain realized through 
the company, plus an interest charge that is attributable to 
the value of deferral.\1575\ A third set of rules applies to 
PFIC stock that is marketable, under which electing U.S. 
shareholders currently take into account as income (or loss) 
the difference between the fair market value of the stock as of 
the close of the taxable year and their adjusted basis in such 
stock (subject to certain limitations), often referred to as 
``marking to market.''\1576\
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    \1572\Pub. L. No. 99-514.
    \1573\Sec. 1297.
    \1574\Secs. 1293-1295.
    \1575\Sec. 1291.
    \1576\Sec. 1296
---------------------------------------------------------------------------
      Under the PFIC regime, passive income is any income which 
is of a kind that would be foreign personal holding company 
income, including dividends, interest, royalties, rents, and 
certain gains on the sale or exchange of property, commodities, 
or foreign currency. However, among other exceptions, passive 
income does not include any income derived in the active 
conduct of an insurance business by a corporation that is 
predominantly engaged in an insurance business and that would 
be subject to tax under subchapter L if it were a domestic 
corporation.\1577\ In applying the insurance exception, the IRS 
analyzes whether risks assumed under contracts issued by a 
foreign company organized as an insurer are truly insurance 
risks, whether the risks are limited under the terms of the 
contracts, and the status of the company as an insurance 
company.\1578\
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    \1577\Sec. 1297(b)(2)(B).
    \1578\Notice 2003-34, 2003-C.B. 1 990, June 9, 2003. See also, 
Prop. Treas. Reg. sec. 1.1297-4, 26 CFR Part 1, REG-108214-15, April 
24, 2015.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision modifies the requirements for a corporation 
the income of which is not included in passive income for 
purposes of the PFIC rules. The provision replaces the test 
based on whether a corporation is predominantly engaged in an 
insurance business with a test based on the corporation's 
insurance liabilities.\1579\ The requirement that the foreign 
corporation would be subject to tax under subchapter L if it 
were a domestic corporation is retained.
---------------------------------------------------------------------------
    \1579\ Treasury regulations proposed in 2015 have taken a different 
approach that is based on the current statutory rule. Prop. Treas. Reg. 
sec. 1.1297-4, 26 CFR Part 1, REG-108214-15, April 24, 2015. The 
proposed regulations provide that ``the term insurance business means 
the business of issuing insurance and annuity contracts and the 
reinsuring of risks underwritten by insurance companies, together with 
those investment activities and administrative services that are 
required to support or are substantially related to insurance and 
annuity contracts issued or reinsured by the foreign corporation.'' The 
proposed regulations provide that an investment activity is an activity 
producing foreign personal holding company income, and that is 
``required to support or [is] substantially related to insurance and 
annuity contracts issued or reinsured by the foreign corporation to the 
extent that income from the activities is earned from assets held by 
the foreign corporation to meet obligations under the contracts.'' The 
preamble to the proposed regulations specifically requests comments on 
the proposed regulations ``with regard to how to determine the portion 
of a foreign insurance company's assets that are held to meet 
obligations under insurance contracts issued or reinsured by the 
company,'' for example, if the assets ``do not exceed a specified 
percentage of the corporation's total insurance liabilities for the 
year.'' Ibid.
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      Under the provision, passive income for purposes of the 
PFIC rules does not include income derived in the active 
conduct of an insurance business by a corporation (1) that 
would be subject to tax under subchapter L if it were a 
domestic corporation; and (2) the applicable insurance 
liabilities of which constitute more than 25 percent of its 
total assets as reported on the company's applicable financial 
statement for the last year ending with or within the taxable 
year.
      For the purpose of the provision's exception from passive 
income, applicable insurance liabilities mean, with respect to 
any property and casualty or life insurance business (1) loss 
and loss adjustment expenses, (2) reserves (other than 
deficiency, contingency, or unearned premium reserves) for life 
and health insurance risks and life and health insurance claims 
with respect to contracts providing coverage for mortality or 
morbidity risks. This includes loss reserves for property and 
casualty, life, and health insurance contracts and annuity 
contracts. Unearned premium reserves with respect to any type 
of risk are not treated as applicable insurance liabilities for 
purposes of the provision. For purposes of the provision, the 
amount of any applicable insurance liability may not exceed the 
lesser of such amount (1) as reported to the applicable 
insurance regulatory body in the applicable financial statement 
(or, if less, the amount required by applicable law or 
regulation), or (2) as determined under regulations prescribed 
by the Secretary.
      An applicable financial statement is a statement for 
financial reporting purposes that (1) is made on the basis of 
generally accepted accounting principles, (2) is made on the 
basis of international financial reporting standards, but only 
if there is no statement made on the basis of generally 
accepted accounting principles, or (3) except as otherwise 
provided by the Secretary in regulations, is the annual 
statement required to be filed with the applicable insurance 
regulatory body, but only if there is no statement made on 
either of the foregoing bases. Unless otherwise provided in 
regulations, it is intended that generally accepted accounting 
principles means U.S. GAAP.
      The applicable insurance regulatory body means, with 
respect to any insurance business, the entity established by 
law to license, authorize, or regulate such insurance business 
and to which the applicable financial statement is provided. 
For example, in the United States, the applicable insurance 
regulatory body is the State insurance regulator to which the 
corporation provides its annual statement.
      If a corporation fails to qualify solely because its 
applicable insurance liabilities constitute 25 percent or less 
of its total assets, a United States person who owns stock of 
the corporation may elect in such manner as the Secretary 
prescribes to treat the stock as stock of a qualifying 
insurance corporation if (1) the corporation's applicable 
insurance liabilities constitute at least 10 percent of its 
total assets, and (2) based on the applicable facts and 
circumstances, the corporation is predominantly engaged in an 
insurance business, and its failure to qualify under the 25 
percent threshold is due solely to runoff-related or rating-
related circumstances involving such insurance business.
      Facts and circumstances that tend to show the firm may 
not be predominantly engaged in an insurance business include a 
small number of insured risks with low likelihood but large 
potential costs; workers focused to a greater degree on 
investment activities than underwriting activities; and low 
loss exposure. Additional relevant facts for determining 
whether the firm is predominantly engaged in an insurance 
business include: claims payment patterns for the current and 
prior years; the firm's loss exposure as calculated for a 
regulator such as the SEC or for a rating agency, or if those 
are not calculated, for internal pricing purposes; the 
percentage of gross receipts constituting premiums for the 
current and prior years; and the number and size of insurance 
contracts issued or taken on through reinsurance by the firm. 
The fact that a firm has been holding itself out as an insurer 
for a long period is not determinative either way.
      Runoff-related or rating-related circumstances include, 
for example, the fact that the company is in runoff, that is, 
it is not taking on new insurance business (and consequently 
has little or no premium income), and is using its remaining 
assets to pay off claims with respect to pre-existing insurance 
risks on its books. Such circumstances also include, for 
example, the application to the company of specific 
requirements with respect to capital and surplus relating to 
insurance liabilities imposed by a rating agency as a condition 
of obtaining a rating necessary to write new insurance business 
for the current year.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the House bill and the 
Senate amendment.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2017.
2. Repeal of fair market value of interest expense apportionment (sec. 
        14503 of the Senate amendment and sec. 864 of the Code)

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision prohibits members of a U.S. affiliated 
group from allocating interest expense on the basis of the fair 
market value of assets for purposes of section 864(e). Instead, 
the members must allocate interest expense based on the 
adjusted tax basis of assets.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.

                          CONFERENCE AGREEMENT

      The conference agreement follows the Senate amendment.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2017.
3. Modification to source rules involving possessions (sec. 14504 of 
        the Senate amendment and sec. 865 of the Code)

                              PRESENT LAW

In general
      The U.S. Virgin Islands, Guam, and the Commonwealth of 
the Northern Mariana Islands have income tax systems that 
``mirror'' the U.S. Code, with the latter two possessions being 
permitted under current law to delink and use their own tax 
systems provided certain conditions are met. The U.S. Virgin 
Islands may also impose certain local income taxes in addition 
to taxes imposed by the mirror Code. The Code provides rules 
for coordination of United States and U.S. Virgin Islands 
taxation.\1580\ It permits the U.S. Virgin Islands to reduce or 
remit tax otherwise imposed by the mirror code if the tax is 
attributable to U.S. Virgin Islands source income or income 
effectively connected to the conduct of a trade or business in 
U.S. Virgin Islands.\1581\ The U.S. Virgin Islands has 
exercised that authority to provide development incentives for 
certain types of businesses operating within its borders. Under 
such initiatives, companies can receive a 90 percent reduction 
in their tax liability on certain income.
---------------------------------------------------------------------------
    \1580\Secs. 932 and 934.
    \1581\Sec. 934. In general, a bona fide resident of the U.S. Virgin 
Islands is required to file and pay tax only to the possession. Persons 
incurring income tax liability in both the United States and the U.S. 
Virgin Islands are required to file tax returns and pay income tax to 
both jurisdictions.
---------------------------------------------------------------------------
Taxation of individuals
      Under the mirror Code, U.S. Virgin Islands citizens and 
residents are taxable on their worldwide income. A foreign tax 
credit is allowed for income taxes paid to the United States, 
foreign countries, and other possessions of the United States. 
In general, a bona fide resident of the U.S. Virgin Islands is 
required to file and pay tax only to the possession; compliance 
with that obligation satisfies any Federal income tax filing 
obligation. All other U.S. residents or citizens with income 
from U.S. Virgin Island sources are subject to a dual filing 
requirement.
      In the case of an individual who is a U.S. citizen or 
alien residing in the United States or the U.S. Virgin Islands, 
only one tax is computed under the Code. If an individual is a 
bona fide resident of U.S. Virgin Islands for the entire 
taxable year, such tax is payable to the U.S. Virgin Islands 
and no U.S. tax is imposed. Otherwise, a citizen or resident of 
the United States who has income from sources within the U.S. 
Virgin Islands must determine the portion of income 
attributable to the U.S. Virgin Islands and the related tax 
payable to the U.S. Virgin Islands. The remaining portion is 
payable to the United States.\1582\
---------------------------------------------------------------------------
    \1582\Sec. 932(b). See, Internal Revenue Service, Tax Guide for 
Individuals with Income from U.S. Possessions (Pub. 570), 2011, pp. 17-
18.
---------------------------------------------------------------------------
      Concerns that U.S. citizens not resident in the U.S. 
Virgin Islands were improperly claiming residence in the U.S. 
Virgin Islands\1583\ or forming entities in the U.S. Virgin 
Islands in order to recharacterize income earned in the United 
States as sourced in the U.S. Virgin Islands and claim the 90 
percent economic development credit led to legislative changes 
in 2004.\1584\ These changes provided a definition of bona fide 
residence in a possession and rules to determine source of 
income from possessions. They also impose a requirement that 
individuals report any change in residency status with respect 
to a possession during a taxable year.\1585\
---------------------------------------------------------------------------
    \1583\In Notice 2004-45, 2004-2 C.B. 33 (2004), the IRS described 
several scenarios in which U.S. persons claimed to have satisfied U.S. 
liabilities by having filed a return with the U.S. Virgin Islands.
    \1584\McHenry v. Commissioner, 2012 U.S. App. LEXIS 7562 (April 16, 
2012) and Huff v. Commissioner, 135 T.C. 605 (2010).
    \1585\Sec. 937. In the preamble to final regulations issued in 
2008, certain de minimis exceptions are provided for the U.S. citizen 
or resident with income from U.S. Virgin Island sources, in recognition 
that ``the interaction of section 937 and other sections of the Code 
relating to the territories requires a balance between implementing the 
policies Congress intended in section 937(b) while recognizing the 
territories' efforts to retain and attract workers and businesses.'' 
T.D. 9391, 73 F.R. 19350 (April 9, 2008); Treas. Reg. Sec. 1.937-2. 
Those required to report changes in residency status must use Form 
8898, ``Statement for Individuals Who Begin or End Bona Fide Residence 
in a U.S. Possession.''
---------------------------------------------------------------------------
Taxation of corporations
      If a corporation is formed in U.S. Virgin Islands, it is 
classified as a domestic corporation for U.S. Virgin Islands 
purposes and a foreign corporation for U.S. tax purposes. Such 
a corporation is only subject to U.S. tax if it has U.S.-source 
income or income effectively connected with the conduct of a 
trade or business in the United States. U.S. Virgin Islands 
taxes a domestic corporation on its worldwide income, but the 
company is allowed a foreign tax credit against U.S. Virgin 
Islands tax for taxes imposed by the United States, foreign 
countries and other possessions. A corporation that is not 
formed in U.S. Virgin Islands is treated as a foreign 
corporation under the U.S. Virgin Islands mirror Code. A 
company not formed in U.S. Virgin Islands is only subject to 
U.S. Virgin Islands tax if it has U.S. Virgin Islands source 
income or income effectively connected with the conduct of a 
trade or business in U.S. Virgin Islands. The United States 
taxes its domestic corporations on their worldwide income, but 
allows a foreign tax credit for taxes imposed by foreign 
jurisdictions, including U.S. Virgin Islands.
Sourcing rules
      As a general rule, the principles for determining whether 
income is U.S. source are applicable for purposes of 
determining whether income is possession source. In addition, 
the principles for determining whether income is effectively 
connected with the conduct of a U.S. trade or business are 
applicable for purposes of determining whether income is 
effectively connected to the conduct of a possession trade or 
business. However, except as provided in regulations, any 
income treated as U.S. source income or as effectively 
connected with the conduct of a U.S. trade or business is not 
treated as income from within any possession or as effectively 
connected with a trade or business within any such 
possession.\1586\ This rule applies regardless of where the 
office or fixed place of business connected to such trade or 
business is located.
---------------------------------------------------------------------------
    \1586\1586 Sec. 937(b).
---------------------------------------------------------------------------
      Section 865(j)(3) was added by the Technical and 
Miscellaneous Revenue Act of 1988 (``TAMRA''),\1587\ and states 
that Treasury is authorized to waive the requirements imposed 
by sections 865(e)(1)(B) and 865(g)(2) (both of which impose a 
10 percent foreign tax requirement for source treatment of 
sales of personal property) for the purposes of determining 
Guam, American Samoa, Commonwealth of the Northern Mariana 
Islands, and Puerto Rico-source income (sections 931 and 933, 
respectively).
---------------------------------------------------------------------------
    \1587\Pub. L. No. 100-647.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision modifies the sourcing rule in section 
937(b)(2) by modifying the U.S. income limitation to exclude 
only U.S. source (or effectively connected) income attributable 
to a U.S. office or fixed place of business. The provision also 
modifies section 865(j)(3) by providing Treasury with the 
authority to waive the 10% foreign tax requirement for source 
treatment of capital gains income earned by a U.S. Virgin 
Islands resident.
      Effective date.--The provision shall apply to taxable 
years beginning after December 31, 2018.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                                TITLE II

Section 20001. Oil and Gas Program
      Section 20001 directs the Secretary of the Interior to 
establish and administer all aspects of a competitive oil and 
gas program in the non-wilderness portion of the Arctic 
National Wildlife Refuge, known as the ``1002 Area'' or Coastal 
Plain. The legislation defines the term ``Coastal Plain'' by 
referencing Plate 1 and Plate 2 of the October 24, 2017 Map 
prepared by the United States Geological Survey.
      The legislation repeals the prohibition on development 
from the Coastal Plain contained in section 1003 of the Alaska 
National Interest Lands Conservation Act (16 U.S.C. 3143), and 
directs the Secretary to manage the oil and gas program on the 
Coastal Plain in a manner similar to what is required by the 
Naval Petroleum Reserves Production Act of 1976 (42 U.S.C. 6501 
et seq.). The legislation sets a 16.67 percent royalty rate for 
leases and allocates 50 percent of the revenue derived from the 
program to the State of Alaska, with the remainder going to the 
Federal Treasury.
      Section 20001 further requires the Secretary to conduct 
at least two area-wide lease sales within the 10-year budget 
window--the first lease sale within four years of the Act's 
enactment and the second lease sale within seven years of 
enactment. Each lease sale must contain not fewer than 400,000 
acres and be comprised of those areas that have the highest 
hydrocarbon potential.
      The legislation directs the Secretary to issue any 
necessary rights-of-way or easements across the Coastal Plain 
for the exploration, development, production, or transportation 
associated with the oil and gas program. Additionally, the 
section authorizes the development of up to 2,000 surface acres 
of federal land on the Coastal Plain.
Section 20002. Limitations on Amount of Distributed Qualified Outer 
        Continental Shelf Revenues
      Section 20002 temporarily increases the annual limitation 
on offshore revenue sharing under section 105(f)(1) of the Gulf 
of Mexico Energy Security Act of 2006 (Public Law 109-432) for 
the states of Alabama, Louisiana, Mississippi, and Texas from 
$500 million annually for FY 2020 and FY 2021, to $650 million 
annually for those two fiscal years.
Section 20003. Strategic Petroleum Reserve Drawdown and Sale
      Section 20003 directs the Secretary of Energy to draw 
down and sell a total of seven million barrels of crude oil 
from the Strategic Petroleum Reserve during FY 2026 through FY 
2027. The section prohibits the Secretary from taking actions 
that would limit the President's authority to direct a drawdown 
and sale of petroleum products to address a domestic or 
international energy supply shortage pursuant to section 161(h) 
of the Energy Policy and Conservation Act (42 U.S.C. 6241). The 
Secretary is further directed to stop the drawdown or sale of 
crude oil after the date on which a total of $600 million has 
been deposited in the general fund of the Federal Treasury.

   CONGRESSIONAL EARMARKS, LIMITED TAX BENEFITS, AND LIMITED TARIFF 
                                BENEFITS

      With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                        TAX COMPLEXITY ANALYSIS

      Section 4022(b) of the Internal Revenue Service Reform 
and Restructuring Act of 1998 requires the staff of the Joint 
Committee on Taxation (in consultation with the Internal 
Revenue Service and the Treasury Department) to provide a tax 
complexity analysis. The complexity analysis is required for 
all legislation reported by the Senate Committee on Finance, 
the House Committee on Ways and Means, or any committee of 
conference if the legislation includes a provision that 
directly or indirectly amends the Code and has widespread 
applicability to individuals or small businesses. The staff of 
the Joint Committee on Taxation has determined that the 
following provisions are of widespread applicability to 
individuals or small businesses.
1. Temporary modification of tax rates, tax brackets, standard 
        deduction and repeal of personal exemptions (secs. 11001, 
        11002, 11021 and 11041 of the bill)
Summary description of the provisions
      The bill temporarily changes the structure of the 
individual income tax by modifying the rate structure such that 
the tax brackets are 10-percent, 12-percent, 22-percent, 24-
percent, 32-percent, 35-percent and 37-percent. The bill 
temporarily increases the size of the standard deduction (for 
2018 the standard deduction is $24,000 for joint filers, 
$18,000 for heads of household and $12,000 for other filers), 
and temporarily eliminates personal exemptions. These 
provisions sunset for taxable years beginning after December 
31, 2025.
Number of affected taxpayers
      It is estimated that the provision will affect 
approximately 120 million tax returns.
Discussion
      It is not anticipated that individuals will need to keep 
additional records due to these provisions. It should not 
result in an increase in disputes with the IRS, nor will 
regulatory guidance be necessary to implement this provision.
      The IRS will need to adjust its wage withholding tables 
to reflect the repeal of personal exemptions. Because revised 
wage withholding will occur within the first month of 2018, 
this would require employers to switch to new withholding 
tables somewhat quickly, which can be expected to result in a 
one-time additional burden for employers (or potential 
additional costs for employers that rely on a bookkeeping or 
payroll service).
      The IRS will need to modify its forms and publications. 
The temporary nature of the provision will necessitate that the 
IRS do this again once the temporary provisions expire.
      Some taxpayers who currently itemize deductions may 
respond to the provision by claiming the increased standard 
deduction in lieu of itemizing. According to estimates by the 
staff of the Joint Committee on Taxation, approximately 94-
percent of taxpayers will claim the standard deduction under 
the bill, up from approximately 70-percent under present law. 
These taxpayers will no longer have to file Schedule A to Form 
1040, a significant number of which will no longer need to 
engage in the record keeping inherent in itemizing below-the-
line deductions. Moreover, by claiming the standard deduction, 
such taxpayers may qualify to use simpler versions of the Form 
1040 (i.e., Form 1040EZ or Form 1040A) that are not available 
to individuals who itemize their deductions. These forms 
simplify the return preparation process by eliminating from the 
Form 1040 those items that do not apply to particular 
taxpayers.
      This reduction in complexity and record keeping also may 
result in a decline in the number of individuals using a tax 
preparation service, or tax preparation software, or a decline 
in the cost of such service or software. The provision also 
should reduce the number of disputes between taxpayers and the 
IRS regarding the substantiation of itemized deductions.
2. Temporary deduction for qualified business income (sec. 11011 of the 
        bill)
Summary description of the provisions
      For taxable years beginning after December 31, 2017 and 
before January 1, 2026, an individual taxpayer generally may 
deduct 20 percent of qualified business income from a 
partnership, S corporation, or sole proprietorship, as well as 
20 percent of aggregate qualified REIT dividends, qualified 
cooperative dividends, and qualified publicly traded 
partnership income. Special rules apply to specified 
agricultural or horticultural cooperatives permitting the 
cooperative a deduction.
      A limitation based on the greater of 50 percent of W-2 
wages paid, or the sum of 25 percent of W-2 wages paid plus a 
capital allowance, is phased in above a threshold amount of 
taxable income. A disallowance of the deduction with respect to 
specified service trades or businesses is also phased in above 
the same threshold amount of taxable income. The threshold 
amount is $157,500 (twice that amount or $315,000 in the case 
of a joint return), indexed. These limitations are fully phased 
in for a taxpayer with taxable income in excess of the 
threshold amount plus $50,000 ($100,000 in the case of a joint 
return).
      Qualified business income for a taxable year generally 
means the net amount of domestic qualified items of income, 
gain, deduction, and loss with respect to the taxpayer's 
qualified businesses. Qualified business income does not 
include any amount paid by an S corporation that is treated as 
reasonable compensation of the taxpayer. Similarly, qualified 
business income does not include any guaranteed payment for 
services rendered with respect to the trade or business, and to 
the extent provided in regulations, does not include any amount 
allocated or distributed by a partnership to a partner who is 
acting other than in his or her capacity as a partner for 
services. Qualified business income or loss does not include 
certain investment-related income, gain, deductions, or loss.
Number of affected taxpayers
      It is estimated that the provision will affect over ten 
percent of small business tax returns.
Discussion
      It is not anticipated that individuals will need to keep 
additional records due to the provision. It should not result 
in an increase in disputes with the IRS, nor will regulatory 
guidance be necessary to implement this provision. It may, 
however, increase the number of questions that taxpayers ask 
the IRS, such as how to calculate qualified business income and 
how to apply the phaseins of the W-2 wage (or W-2 wage and 
capital) limit and of the exclusion of service business income 
in the case of taxpayers with taxable income exceeding the 
threshold amount of $157,500 (twice that amount or $315,000 in 
the case of a joint return), indexed. This increased volume of 
questions could have an adverse impact on other elements of 
IRS's operation, such as the levels of taxpayer service. The 
provision should not increase the tax preparation costs for 
most individuals.
      The IRS will need to add to the individual income tax 
forms package a new worksheet so that taxpayers can calculate 
their qualified business income, as well as the phaseins. This 
worksheet will require a series of calculations.
3. Temporary increase in child tax credit (sec. 11022 of the bill)
Summary description of the provisions
      The bill temporarily increases the value of the child tax 
credit to $2,000, providing that no more than $1,400 per child 
shall be refundable. This $1,400 limitation is indexed for 
inflation. In order to qualify for the child tax credit, a 
Social Security number must be provided for the qualifying 
child for whom such credit is claimed. These provisions sunset 
for taxable years beginning after December 31, 2025.
Number of affected taxpayers
      It is estimated that the provision will affect 
approximately 90 million tax returns.
Discussion
      It is not anticipated that individuals will need to keep 
additional records due to these provisions. It should not 
result in an increase in disputes with the IRS, nor will 
regulatory guidance be necessary to implement this provision. 
The provision may, however, increase the number of questions 
that taxpayers ask the IRS, such as whether they may claim the 
new family credit for certain members of their household, or 
whether and to what extent the combined tax credit is 
refundable.
      The IRS will need to modify its forms and publications to 
reflect this change. The temporary nature of the provision will 
necessitate that the IRS do this again once the temporary 
provision expires.
4. Temporary suspension of the deduction for State and local income 
        taxes (sec. 11042 of the bill)
Summary description of the provisions
      The bill provides that in the case of an individual, as a 
general matter, State, local, and foreign property taxes and 
State and local sales taxes are allowed as a deduction only 
when paid or accrued in carrying on a trade or business, or an 
activity described in section 212 (relating to expenses for the 
production of income). Thus, the provision allows only those 
deductions for State, local, and foreign property taxes, and 
sales taxes, that are presently deductible in computing income 
on an individual's Schedule C, Schedule E, or Schedule F on 
such individual's tax return. Thus, for instance, in the case 
of property taxes, an individual may deduct such items only if 
these taxes were imposed on business assets (such as 
residential rental property).
      Under the bill, in the case of an individual, State and 
local income, war profits, and excess profits taxes are not 
allowable as a deduction.
      The bill contains an exception to the above-stated rule. 
Under the provision a taxpayer may claim an itemized deduction 
of up to $10,000 ($5,000 for married taxpayer filing a separate 
return) for the aggregate of (i) State and local property taxes 
not paid or accrued in carrying on a trade or business, or an 
activity described in section 212, and (ii) State and local 
income, war profits, and excess profits taxes (or sales taxes 
in lieu of income, etc. taxes) paid or accrued in the taxable 
year. Foreign real property taxes may not be deducted under 
this exception.
      The above rules apply to taxable years beginning after 
December 31, 2017, and beginning before January 1, 2026.
      The bill also provides that, in the case of an amount 
paid in a taxable year beginning before January 1, 2018, with 
respect to a State or local income tax imposed for a taxable 
year beginning after December 31, 2017, the payment shall be 
treated as paid on the last day of the taxable year for which 
such tax is so imposed for purposes of applying the provision 
limiting the dollar amount of the deduction. Thus, under the 
provision, an individual may not claim an itemized deduction in 
2017 on a pre-payment of income tax for a future taxable year 
in order to avoid the dollar limitation applicable for taxable 
years beginning after 2017.
Number of affected taxpayers
      It is estimated that the provision will affect 
approximately 44 million tax returns.
Discussion
      It is not anticipated that individuals will need to keep 
additional records due to this provision. Because the deduction 
for State and local taxes has been longstanding in the Code, 
its repeal may require regulatory guidance, so as to provide 
guidance for taxpayers regarding which taxes remain properly 
deductible on an individual's Schedule C, Schedule E or 
Schedule F. This may also result in an increase in disputes 
with the IRS.
      The IRS will need to modify its forms and publications to 
reflect this change. The temporary nature of the provision will 
necessitate that the IRS do this again once the temporary 
provision expires.
5. Modifications of rules for expensing depreciable business assets 
        (sec. 13101 of the bill)
      The bill increases the maximum amount a taxpayer may 
expense under section 179 to $1,000,000, and increases the 
phase-out threshold amount to $2,500,000. The $1,000,000 and 
$2,500,000 amounts, as well as the $25,000 sport utility 
vehicle limitation, are indexed for inflation for taxable years 
beginning after 2018.
      The bill expands the definition of section 179 property 
to include certain depreciable tangible personal property used 
predominantly to furnish lodging or in connection with 
furnishing lodging.
      The bill also expands the definition of qualified real 
property eligible for section 179 expensing to include any of 
the following improvements to nonresidential real property 
placed in service after the date such property was first placed 
in service: roofs; heating, ventilation, and air-conditioning 
property; fire protection and alarm systems; and security 
systems.
      The bill applies to property placed in service in taxable 
years beginning after December 31, 2017.
Number of affected taxpayers
      It is estimated that the provision will affect over ten 
percent of small business tax returns.
Discussion
      While taxpayers purchasing section 179 property will 
still be required to complete and file Form 4562, Depreciation 
and Amortization (Including Information on Listed Property), 
significantly less detail is required to be included on such 
form. Accordingly, the compliance burden of many taxpayers will 
be reduced.
6. Temporary 100-percent expensing for certain business assets (sec. 
        13201 of the bill)
      The bill extends and modifies the additional first-year 
depreciation deduction through 2026 (through 2027 for longer 
production period property and certain aircraft). The 50-
percent allowance is increased to 100 percent for property 
acquired and placed in service after September 27, 2017, and 
before January 1, 2023 (January 1, 2024, for longer production 
period property and certain aircraft), as well as for specified 
plants planted or grafted after September 27, 2017, and before 
January 1, 2023. Thus, the bill follows the present-law phase-
down of bonus depreciation for property acquired before 
September 28, 2017, and placed in service after September 27, 
2017. The 100-percent allowance is phased down by 20 percent 
per calendar year for property placed in service, and specified 
plants planted or grafted, in taxable years beginning after 
2022 (after 2023 for longer production period property and 
certain aircraft).
      The bill removes the requirement that the original use of 
qualified property must commence with the taxpayer (i.e., it 
allows the additional first-year depreciation deduction for new 
and used property).
      As a conforming amendment to the repeal of corporate AMT, 
the election to accelerate AMT credits in lieu of bonus 
depreciation is repealed.
      The bill maintains the section 280F increase amount of 
$8,000 for passenger automobiles placed in service after 
December 31, 2017. However, the bill follows the present-law 
phase-down of the section 280F increase amount in the 
limitation on the depreciation deduction allowed with respect 
to certain passenger automobiles acquired before September 28, 
2017, and placed in service after September 27, 2017.
      The bill extends the special rule under the percentage-
of-completion method for the allocation of bonus depreciation 
to a long-term contract for property placed in service before 
January 1, 2027 (January 1, 2028, in the case of longer 
production period property).
      The bill expands the definition of qualified property 
eligible for the additional first-year depreciation allowance 
to include qualified film, television and live theatrical 
productions (as defined in section 181(d) and (e)) for which a 
deduction otherwise would have been allowable under section 181 
without regard to the dollar limitation or termination of such 
section, effective for productions placed in service after 
September 27, 2017, and before January 1, 2027. For purposes of 
this provision, a production is considered placed in service at 
the time of initial release, broadcast, or live staged 
performance (i.e., at the time of the first commercial 
exhibition, broadcast, or live staged performance of a 
production to an audience).
      The bill excludes from the definition of qualified 
property any property which is primarily used in the trade or 
business of the furnishing or sale of (1) electrical energy, 
water, or sewage disposal services, (2) gas or steam through a 
local distribution system, or (3) transportation of gas or 
steam by pipeline, if the rates for such furnishing or sale, as 
the case may be, have been established or approved by a State 
or political subdivision thereof, by any agency or 
instrumentality of the United States, by a public service or 
public utility commission or other similar body of any State or 
political subdivision thereof, or by the governing or 
ratemaking body of an electric cooperative.
      The bill excludes from the definition of qualified 
property any property used in a trade or business that has had 
floor plan financing indebtedness, unless the taxpayer with 
such trade or business is not a tax shelter prohibited from 
using the cash method and is exempt from the interest 
limitation rules by meeting a small business $25 million gross 
receipts test.
Number of affected taxpayers
      It is estimated that the provision will affect over ten 
percent of small business tax returns.
Discussion
      The reporting requirements are unchanged by this 
provision. Capital assets purchased during the tax year will 
still need to be reported on Form 4562, Depreciation and 
Amortization (Including Information on Listed Property); 
however, the current year tax deduction associated with such 
assets will increase.


                From the Committee on Ways and Means, for 
                consideration of the House bill and the Senate 
                amendment, and modifications committed to 
                conference:
                                   Kevin Brady,
                                   Devin Nunes,
                                   Peter J. Roskam,
                                   Diane Black,
                                   Kristi L. Noem,
                From the Committee on Energy and Commerce, for 
                consideration of sec. 20003 of the Senate 
                amendment, and modifications committed to 
                conference:
                                   Fred Upton,
                                   John Shimkus,
                From the Committee on Natural Resources, for 
                consideration of secs. 20001 and 20002 of the 
                Senate amendment, and modifications committed 
                to conference:
                                   Rob Bishop,
                                   Don Young,
                                 Managers on the Part of the House.

                                   Orrin G. Hatch,
                                   Michael B. Enzi,
                                   Lisa Murkowski,
                                   John Cornyn,
                                   John Thune,
                                   Rob Portman,
                                   Tim Scott,
                                   Patrick J. Toomey,
                                Managers on the Part of the Senate.
                                ENDNOTES

    This table belongs to Footnote 520

 
       Recovery method          Year 1    Year 2    Year 3    Year 4    Year 5    Year 6    Year 7      Total
 
200-percent declining balance    288.71    204.08    145.77    104.12     86.77     86.77     86.77     1,000.00
150-percent declining balance    214.29    168.37    132.29    121.26    121.26    121.26    121.26     1,000.00
Straight-line................    142.86    142.86    142.86    142.86    142.86    142.86    142.86     1,000.00
 

    This table belongs to Footnote 540

 
       Recovery method          Year 1    Year 2    Year 3    Year 4    Year 5    Year 6    Year 7      Total
 
200-percent declining balance    285.71    204.08    145.77    104.12     86.77     86.77     86.77     1,000.00
150-percent declining balance    214.29   2168.37    132.29    121.26    121.26    121.26    121.26     1,000.00
Straight -line...............    142.86    142.86    142.86    142.86    142.86    142.86    142.86     1,000.00
 

    This table belongs to Footnote 573

 
       Recovery method          Year 1    Year 2    Year 3    Year 4    Year 5    Year 6    Year 7      Total
 
200-percent delining balance.    285.71    204.08    145.77    104.12     86.77     86.77     86.77     1,000.00
150-percent declining balance    214.29    168.37    132.29    121.26    121.26    121.26    121.26     1,000.00
Straight-line................    142.86    142.86    142.86    142.86    142.86    142.86    142.86     1,000.00